Four Stock Market Sectors to Be Cautious About – Chad Shoop, CMT
“Cam, come get your picture with this fish!” I shouted across the dock to my son.
I had just caught a nice, unique-looking fish that I had never seen before. I wanted to get his picture with it since it was our first time fishing in Florida.
This one had an orange-brown coloring, which is apparently good for blending in with rocks and reefs on the bottom of the ocean.
Hence, its name — rockfish.
“I wouldn’t do that!” my uncle shouted. “Those are some of the most poisonous fish in the ocean. Don’t touch it.”
Needless to say, we didn’t get our picture with this one.
But my point is that it’s important to know which fish you can, and can’t, touch.
The same is true with investing in the stock market.
Right now, there are four sectors that you don’t want to touch for several weeks — no matter how nice they look.
Let me explain…
I have written recently on how bullish I am on the stock market. In particular, how this current earnings season will help lift the S&P 500 Index to new all-time highs.
I remain extremely bullish. But I also don’t ignore the historical seasonal trends that can tug on the market.
I track these seasonal trends in the stock market constantly.
My preference is to track the broader, sector-based trends. These trends tend to pull the underlying stocks of those sectors in the same general direction.
But over the next month, I expect to see some short-term weakness, specifically in just a few sectors.
Those sectors you’ll want to avoid are:
- The materials sector.
- The health care sector.
- The consumer discretionary sector.
- The semiconductor sector.
According to their 10-year seasonal patterns, this is the time of year when these sectors are most vulnerable to seeing consistent weakness, and I’m looking for that trend to take place this year.
Now, this doesn’t contradict my bullish views.
Currently, stocks are in a period that is considered to be the worst six months of the year, from May through October.
I have been telling you that now is an excellent time to buy, not sell, since we experienced a correction at the start of the year.
Well, since May 1, the S&P 500 has jumped over 6% — a solid move considering that a 10% gain in any given year is considered average.
We still have five months left in the year, and we’ll see another strong rally before it’s over.
But for about the next month, we could see some weakness, especially in those four sectors — materials, health care, consumer discretionary and semiconductors.
That’s because of their seasonal trends that have developed over the last decade.
Here’s how to take advantage of this dip.
An Easy Way to Trade Falling Sectors
First off, I don’t recommend shorting individual stocks.
After all, a company’s sole purpose is to increase in shareholder value. Even if you catch a downward move by shorting the stock, any day the company could make an announcement to help prop up the stock and erase your gains.
Still, the major trends I track tend to weigh down the sector in general, and there’s an easy way to play that move.
You can simply buy an inverse ETF that seeks to track the opposite return of a sector.
So, if the sector is falling, the inverse ETF would be rising.
That’s how we take advantage of sector-based falls in Automatic Profits Alert, and it’s my recommended way to profit. Here’s a possible ETF for each sector:
- Materials sector: the ProShares UltraShort Basic Materials ETF (NYSE: SMN).
- Health care sector: the ProShares UltraShort Health Care ETF (NYSE: RXD).
- Consumer discretionary sector: the ProShares UltraShort Consumer Services ETF (NYSE: SCC).
- Semiconductor sector: the ProShares UltraShort Semiconductors ETF (NYSE: SSG).
If you are looking to jump in, be sure to keep a tight leash on these trades. Don’t let them go against you but by just a couple of percent.
Because, as I mentioned, these companies are trying to increase value, and they’ll do anything for a temporary bounce.
If you time it right, you may catch a quick downdraft during the seasonal weakness, like my readers recently saw with inverse energy and oil positions to snag quick 10% gains in just two days.
Even if you don’t want to try to profit from this move, it’s best to play it safe and avoid those sectors until September.
Chad Shoop, CMT
Editor, Automatic Profits Alert