What Sectors to Own & What to Avoid During Worst Six Months By: Christopher Mistal | March 24, 2015 | Email | Print

Each and every year, as the “Worst Six Months” May through October for DJIA and S&P 500 near, the “Sell in May” debate begins. Since 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, we are not going to bother debating whether one should actually sell in May or not. 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, 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, 1990-2014, a full 25 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.

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 10.27% and 5.17% during the “Worst Months.” But, before jumping into Biotech positions, only 20 years of data was available and in those years Biotech was up just 55% 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 25 years of data and a 68% success rate is probably a safer choice than Biotech. Its 5.17% 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 80% of the time is the closed thing to a sure bet for gains during the “Worst Months.” 

At the other end of the performance spectrum we have the sectors to short or avoid altogether. The Materials sector was the worst over the past 25 years, shedding an average 2.07% during the “Worst Six.” Industrials, Transportation and Consumer Discretionary also recorded average losses. However, based solely upon the percentage of time up, the stocks only, PHLX Gold/Silver index is the most consistent loser of the “Worst Six” advancing just 44% of the time.

Also interesting to note is the fact that every sector, gold and 30-year bonds are all positive in May, on average. It’s not until June do things begin to fall apart for many sectors of the market and the market as a whole. July tends to see a broad bounce, but it tends to be short-lived as August and September tend to be downright ugly on average. It is this window of poor performance that has given October a lift in the past 25 years. Only Biotech, 30-year bonds, gold and natural gas manage to post gains in August and September.

During the “Worst Six Months,” Biotech, Health care and Consumer Staples looks like the best place to be while Materials, Industrials and Gold/Silver mining stocks could be shorted or avoided. May looks like a great time to rebalance a portfolio as you will likely be closing out long positions into strength and short trade ideas are worth considering given June’s nearly across-the-board poor performance.