Stack: A Defensive Bull

05/15/2015 9:00 am EST

Focus: STOCKS

James Stack

President, Stack Financial Management

At 76% invested allocation, we are now at our most defensive (highest cash) position since the start of this bull market back in 2009, explains value investor Jim Stack, editor of InvesTech Market Analyst.

One of the best known adages on Wall Street is the "Sell in May" mantra; historically, the winter period from November 1 through April 30 is the prime time to be invested in stocks.

Since 1960, this 6-month period has seen an average return of 7.8% in the S&P 500.

Conversely, the summer doldrums often settle on the stock market from May 1 through October 31. Over the same 55 years, the average return for the May-October period is only 2%.

Of course, the market's downshift from high gear in early May doesn't happen every year and winters aren't always winners while summers aren't always losers. Yet looking back, the evidence of a strong seasonal shift in the majority of years is quite compelling.

If there might be any time that we don't want to overlook this convincing history lesson, it's the seventh year of a bull market with the major indexes hitting new all-time highs.

It's often when everyone becomes complacent that history tends to repeat itself; and this year, with the Fed heading toward an initial rate hike in the next six months, seasonal pressures deserve special attention.

Of course, we aren't advocating that you sell all your holdings in May and move to cash, but there are adjustments that can be made to help capture remaining upside in the stock market and protect your portfolio.

The winter period from November through April tends to favor cyclical stocks. When May starts to emerge, an important sector shift seems to occur. That's when it's prudent to look at your cyclical holdings and see what you should trim or rebalance.

Meanwhile, defensive stocks move to the top of the performance list during the summer months, proving quite resilient despite potential market fluctuations.

Health Care and Staples more than doubled the market's average summer return, and together with Technology and Telecom, they have outpaced the S&P 500 over half the time.

We label ourselves as a defensive bull rather than an outright bear. For now, we should celebrate the profits of what has been one of the most unloved bull markets in our memory and enjoy what gains might be left.

Yet at the same time, we must become ever more vigilant and cognizant that bull markets do not last forever.

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