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Industry Sector Seasonality: Protect Yourself From the Summer Swoon

By Jim Fink on April 28, 2011

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ETFs are extremely useful tools for individual investors looking to implement a top-down investment approach. Such an approach analyzes the industry sectors likely to benefit from prevailing market trends.

– Yiannis Mostrous, Global ETF Profits

One year ago almost to the day, I wrote an article entitled How to Pick Industry Sectors Based on the Business Cycle. The basic idea is that stocks representing different industry sectors perform differently depending on where we are in the business cycle:

Point in the Business Cycle

Best Performing Industry Sectors

Early Expansion

Technology and Consumer Discretionary

Middle Expansion

Energy, Basic Materials, Metals

Late Expansion

Consumer Staples

Recession

Utilities and Financials

The problem with this analytical approach is that it is extremely difficult to determine where we are in the business cycle. Easier said than done! Last year, I speculated that the U.S. economic expansion had 47 months to go and the bull market in stocks had 720 days to go. Consequently, assuming that this time matches historical averages (which it never does), now that it is one year later the economic expansion might only have 35 months left to go and the bull market only 355 days to go. Or not.

Industry Sector Seasonality to the Rescue!

Fortunately for those of us without an economics Ph.D or a business cycle crystal ball, there is a second type of cyclicality that one can identify with exactitude and which has proven useful in finding the best-performing industry sectors: calendar seasonality. That’s right, if you can read a calendar you know exactly when the stocks of various industry sectors have historically tended to outperform the general market. Of course, past historical trends may not repeat, but it’s better than nothing! Actually, another way to choose industry sectors is to see what the superstar mutual fund managers are buying, but I digress.

Summer vs. Winter Industry Sector Seasonality

A 2005 academic paper found that consumer-related stocks (e.g., food, drugs, beer, leisure, utilities, media, and retail) outperform the overall market between May 1st and October 31st and manufacturing and production stocks (e.g., consumer durables, chemicals, construction, mining, steel) outperform between November 1st and April 30th.  All industry sectors perform better in the Nov.-April period, but consumer stocks do reasonably well year-round whereas manufacturing and production stocks really stink up the joint during the summer and early fall. Consequently, the paper’s most important conclusion is that investors can beat the market by avoiding the manufacturing and production stocks in the May-October period. Hmmm….May starts in three days.

Month-Specific Industry Sector Seasonality

There are two other sources for industry-sector seasonality worth noting: (1) Stock Trader’s Almanac and (2) EquityClock.com.  According to the Stock Trader’s Almanac, no industry sectors are good buys starting in May, but we’re still in a bullish phase for computer and Internet stocks, which began in April and ends in July. There are several good shorts to initiate on May 1st: consumer cyclicals, gold/silver, and materials. Get ready to short banks and natural gas beginning in June. 

According to EquityClock.com, which regurgitates information from Thackray’s Investment Guide, the bullish periods for large-cap value stocks and the Canadian dollar end in two days (April 30th) and the metals and mining bull market will end on May 5th.  New bull markets include consumer staples (began April 23rd) and bonds (begins May 1st). Personally, I’m looking forward to the biotech bull that starts on June 23rd (my sister’s birthday) because biotech bulls are usually quite explosive.

Invest in Industry-Sector ETFs with the Help of Global ETF Profits

Global ETF Profits co-editors Ben Shepherd and Yiannis Mostrous focus on low-cost ETFs and ETNs that are most likely to outperform the overall market – both equity and fixed income — going forward. They are not “index huggers” but try to beat the market with their contrarian take on the best industry sectors. In fact, Ben and Yiannis have identified 25 ETFs in a multitude of different sectors that are in buy range right now.  

To find out the specific names of Ben and Yiannis’ favorite industry-sector ETFs, consider giving Global ETF Profits a try today!

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