The S&P 500 does significantly better between November 1st through April 30th (winter) versus May 1st through October 31st (summer). Statistically, this been true two out of three years.
Since 1990 the winter half of the year generated total price change of 6.2% versus 0.5% for the summer half.
Sam Stovall offers several reasons for why this might be true, including the impact of vacation, a lack of capital inflows, and earnings reality overtaking optimism. (Interestingly enough, the same seasonality effects apply for the southern hemisphere as well – their winter is our summer)
Is it worth sitting out of the market simply because the sun is shining? Probably not – after all the market doesn’t generate negative returns during the summer months. It just trends flat.
It might be more reasonable to use a sector rotation strategy in alignment with seasonality. During the winter, cyclical stocks (industrials, technology, consumer discretionary, and financials) outperform. During the summer months, traditionally defensive areas (consumer staples, health care) have generated returns averaging 4.4% over a six-month period.
Is 4.4% better than 0.5%? You bet!
Stovall then puts together a model portfolio which is invested in the S&P 500 from November to April, and switches to Consumer Staples and Health Care stocks in the beginning of May. This are held through the end of October.
The result? This basic seasonal rotation generated compound annual returns of 10.1% versus just 5.8% for the S&P 500 for the 1990-2008 time period.
Investors can follow this strategy using SPDR S&P 500 Index ETF (ticker: SPY), the Consumer Staples Select Sector ETF (XLP) and Health Care Select Sector ETF (XLV).
If anything, this also might also inform the timing of when you might want to add these two sector exposures to your portfolio.
There is another way to finesse market seasonality. This one comes from Jeff Hirsch at The Trader’s Almanac. He suggests using MACD (a momentum indicator) to fine-tune seasonal exit and entry points for the Dow Jones Industrial average.
Starting on October 1st, Hirsch looks for the first sign of positive momentum to get into the market. His strategy gets in on November the 1st at the latest.
Similarly, Hirsch considers getting out anytime after April 1st if the MACD goes negative. If no signal occurs, the strategy is out by May 1st.
This creates a variable seasonal window for exit and entry based on momentum.
Going back to 1950, this strategy, when applied to the Dow Jones Industrial Average, gains an average of 9.2% during the winter months and avoids losses of -1.1% during the summer months. Investors can follow this strategy using the SPDR Dow Jones Industrial Average ETF (DIA).
What to do during the dull summer months? Write covered calls, invest in short-term bonds, switch to defensive stocks, or maybe just take an extended vacation…