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Seasonally, it's Time to be Defensive

05/24/2016 9:00 am EST

Focus: ETFs

James Stack

President, Stack Financial Management

Sector leadership tends to shift significantly as the market moves from the November through April period into the summer months, suggests Jim Stack, market historian, money manager and editor of InvesTech Market Analyst.

Sector leadership tends to shift significantly as the market moves from the November through April period into the summer months.

We’ve assessed the average seasonal performance of the S&P 500 sectors since 1990 looking at the “batting average” or the percentage of time the sector beat the broader index during this seasonal period.

The winter favors cyclical and growth stocks, which are typically boosted by the holiday shopping season.

However, the market often takes on a defensive tone during the summer as these cyclical sectors move to the bottom of the list and the winter laggards take the lead.

It is not too difficult to find technical, economic, monetary, election-related and even valuation reasons to steer a more cautionary course during this volatile year.

We don’t advocate selling all holdings in cyclical sectors when the summer season starts, but there are some steps you might consider in rebalancing your portfolio.

First, investors should focus on the defensive sectors. Healthcare and Staples are the most resilient sectors during the summer and it’s generally a good idea to hold a larger allocation in these segments heading into May.

Their average returns (including dividends) have exceeded 5% over the summer and they beat the market about two-thirds of the time. Likewise, the Technology sector also does well.

The following three defensive sector ETFs are the largest holdings in the Model Fund Portfolio and comprise the majority of the invested allocation”

Health Care Select Sector SPDR (XLV) – a 17% position
Consumer Staples Select Sector SPDR (XLP) – a 14% position
Technology Select Sector SPDR (XLK) – a 16% position

Conversely, investors should trim their holdings in cyclicals. The Industrial, Consumer Discretionary, and Material sectors show the biggest negative shift from the winter period, landing at the bottom of the summer performance lineup.

This may be a good time to consider taking some profits and trimming these groups if they’ve run up. With average summer returns less than 1%, these sectors have lagged the S&P 500 the majority of the time.

The Model Fund Portfolio is currently underweight in these cyclical sectors versus the broader market index.

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By Jim Stack, Editor of InvesTech Market Analyst

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