Best Sectors for the "Worst" Months

05/22/2017 2:50 am EST

Focus: STRATEGIES

Jeffrey Hirsch

Editor-in-Chief, The Stock Trader's Almanac and Almanac Investor

Because we already know that the market tends to post the majority of its gains from November through April and does very little from May to October using data from 1950 to present, we are not going to bother debating whether one should actually sell in May or not, notes Jeffrey Hirsch, editor of Stock Trader's Almanac.

Instead, let’s focus on what tactical changes can be made in portfolios to take advantage of what actually does work during the “Worst Six Months” while either shorting or outright avoiding the worst of the worst. 

In the following table, the performance of the S&P 500 during the “Worst Six Months” May to October is compared to fourteen select sector indices or sub-indices, gold and the 30-year Treasury bond.

Nine of the fourteen indices chosen were S&P Sector indices. Gold and 30-year bond are continuously-linked, non-adjusted front-month futures contracts. With the exception of two indices, 1990-2016, a full 27 years of data was selected.

This selection represents a reasonably balanced number of bull and bear years for each and a long enough timeframe to be statistically significant while representing current trends. In an effort to make an apple-to-apple comparison, dividends are not included in this study.

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Using the S&P 500 as the baseline by which all others were compared, seven indices outperformed during the “Worst Six Months” while nine underperformed based upon “AVG %” returned.

At the top of the list are Biotech and Healthcare with average gains of 8.83% and 4.64% during the “Worst Months.”

But, before jumping into Biotech positions, only 22 years of data was available and in those years Biotech was up just 50% of the time from May through October. Some years, like 2014, gains were massive while in down years losses were frequently nearly as large.

Runner-up, Healthcare with 27 years of data and a 63% success rate is probably a safer choice than Biotech. Its 4.64% AVG % performance comes by way of one less loss in five additional years of data and just two double-digit losses, both in bear markets during 2002 and 2008.

Other “Worst Six” top performers consisted mostly of the usual suspects when considering defensive sectors. Consumer Staples, 30-year Treasury bonds, gold and Utilities all bested the S&P 500.

Information Technology also performed surprisingly well, but appears to be highly correlated with S&P 500 (losing years in bear markets and similar monthly performance figures).

Although not the best sector by AVG %, Consumer Staples advancing 81.5% of the time is the closed thing to a sure bet for gains during the “Worst Months.” 

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