Seasonal Patterns Say to Buy Gold, Sell Semiconductors

Why July 12 could be the day to pile into GLD

Jun 20, 2013, 9:29 am EDT  |  By Daniel Putnam, InvestorPlace Contributor

Market seasonality is notoriously fickle, but it nonetheless captures the imaginations of traders — especially when a trend can be summed up with a pithy rhyme such as “Sell in May and go away.”Still, these seasonal trends can sometimes be useful because they show a central tendency that has played out over time.

And right now, history indicates two important recent moves might be close to running their course.

Gold

The chart below, courtesy of Equity Clock, aggregates the 20 years of gold’s price movements into a single chart. It’s notable that so far this year, the metal has held more or less true to form. After initial strength out of the gate, gold began to lose ground in February-March en route to a negative second quarter. Now, it has entered what is typically a strong period: mid-June to mid-July. If the seasonal trends hold, gold will bounce from its current support of $1,300, retest the low, then reach its low for the year in late summer/early fall — setting the stage for a rally in the fall.

This might help provide a roadmap of how to approach the SPDR Gold Shares (GLD) exchange-traded fund in the months ahead: Specifically, don’t assume that any bounce off of its current level represents the end of the downturn.

In all likelihood, another flush-out will occur before a more sustainable recovery gets underway.Gold stocks, for their part, have averaged a second-half low in the first week of August.

Semiconductors

Another sector that bears watching is semiconductors, which have been on a huge run as of late. Year-to-date, iShares PHLX SOX Semiconductor Sector Index Fund (SOXX) has returned more than 25%, with certain stocks — such as Micron (MU, +117%) and Advanced Micro Devices(AMD, +70%) — knocking the cover off the ball. But now, the sector is entering a time of year when profit-taking might be in order.

The seasonal chart of the SOX Index below shows that semis typically hit a short-term peak in July — a move that appears to be happening a few weeks early this month.

Over time, this move has proven to be a false breakout and a predecessor to the weakest part of the year for semiconductors. This could be a sign that it might not hurt to cash in some gains here rather than trying to squeeze out a few extra percentage points.

What the Charts Say about Biotechs, Energy and Utilities

Equity Clock is a treasure trove for investors with a technical bent, as it can generate seasonal charts on just about any index or individual stock. This page, which shows the ideal buy and sell points for each sector of the U.S. market over the past 20 years, is especially worth a look. Some key points immediately jump off of this page:

• June is one of the worst months to buy into just about any area of the market, with few sectors in the “sweet spot.”
• Having said this, biotechs stand out from the crowd as being one of the few sectors to buy at this time of year. According to the chart, the period from June 23 to Sept. 13 has been the optimal time to own biotechs. This might be a signal that it’s nearing time to buy iShares Nasdaq Biotechnology Index Fund (IBB), which is off 5.2% from its May 16 high.
• Following biotechs, the next sectors in line for seasonal strength are gold (July 12), utilities (July 17) and energy (July 24). Utilities might be one to watch, as the Utilities SPDR (XLU) has shed 7.4% since April 30.

A Final Thought

Seasonality alone is never a reason to make an investment, or even a trade. Each year brings a different set of circumstances, with this year’s wrinkle being the day-to-day volatility surrounding the potential for Fed tapering. Still, these charts can serve as an additional tool to help traders improve their timing.

As of this writing, Daniel Putnam did not hold a position in any of the aforementioned securities.