Three Seasonal Tendencies: Part 2

Symbols I’m looking at for 2022

Let’s revisit our discussion from last week when we spoke about the seasonal tendencies of the Santa Rally, window dressing, and tax loss harvesting. If we know this is going to happen, how do we protect, prepare, and become opportunistic during this season? 

One of the easiest ways that traders can protect themselves in December is to focus their buys in already strong names.

Symbols that are already well structured in a solid uptrend. 

Do not look for the down chart in stock trends that were heading lower since approximately late August, early September. Be wary of weak stocks that suddenly get strong in December.

Weak or down-trending stocks will usually continue to head lower while strong up-trending stocks will benefit from their strength. 

In the case of 2021, think about the strength that we have seen in the Technology Sector (XLK) ETF, the iShares U.S. Home Construction (ITB) ETF, Homebuilders ETF (XHB), Real Estate (XLRE), and even the Consumer Discretionary (XLY) ETF. Anything that has generally been heading higher since late August, early September, will oftentimes be the beneficiary of the Santa Rally and the overall year-end rally. 

Anything that has been weak – think the IYZ telecommunications ETF or the XLC communication ETF which have been heading lower – will typically be part of the tax loss selling, but will likely not benefit from any of the seasonal tendencies we are talking about.   

Come January, portfolio managers will think very differently about building their position as opposed to the way they are wrapping up this past year. At the beginning of the new year, these managers will be changing their perspectives and looking forward to the upcoming 12 months.  For now, during these historical tendencies, they are selling underperforming assets and adding stronger names that finished the year bullishly. 

The natural progression to understand which symbols are strong and which symbols are weak (during the end of this year) would be to understand the high concentration weighting in various ETFs. What does that mean?

Let’s look at the XLK ETF. 

The top two weighted names are Apple and Microsoft. In fact, Apple has been quite strong. Look for Apple to continue to strengthen. Microsoft is also well-positioned to be a long position. So, overall, the XLK ETF is heading higher. 

Let’s take the other side of the conversation. 

This would be the IYZ ETF – telecommunications – which has been one of the hardest hit in the last three to four months. Think about some of the heavily weighted stocks there. Whether it be Disney, Verizon, Comcast, a lot of these names are already in very strong downtrends. Any kind of strength in those names would be an opportunity to what’s known as “sell the rip” or short into a bounce within an already established downtrend. 

Other corners of the market, which could be interesting for some weakness into the year end would be cloud computing (ETFs like CLOU or SKYY) or names like PayPal, Roku, which have been very weak names. Also, avoid The Global X Emerging Markets Internet and E-commerce ETF (EWEB) and KraneShares CSI China Internet ETF (KWEB) for now as tempting as it may be. While I may not be interested in buying these in December, Q1 2022 may be a different story. 

Don’t expect downtrends to reverse into the year end. Look for strength to continue to accelerate, and look for Tesla, likely to continue to accelerate within the XLY. Perhaps even Home Depot. Look for home builders and home construction, which have had a very good October, November, and December, to continue to accelerate into the beginning of next year.

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