Top Sectors to Own During the “Best Six Months”
By: Christopher Mistal
November 05, 2015
Way back in 1986 when Yale Hirsch, creator of the Stock Trader’s Almanac, first published his discovery that the market makes the majority of it gains in just six months of the year, he simple dubbed the pattern the “Best Six Months.” By analyzing monthly performance figures for DJIA and S&P 500 he noted a clear pattern that repeated rather consistently year after year, the bulk of the markets advance was made in the months from November to April. These six months combined have produced an average DJIA gain of 7.5% since 1950 compared to an average gain of just 0.4% during the months May to October. Nowadays this market pattern is often associated with “Sell in May” or referred to as the Halloween indicator. We prefer the “Best Six Months” for obvious reasons and the period just started this past Monday.
We are just beginning the “Best Six Months” and like most traders and investors, we too are also looking for an extra edge. We know the broad market typically performs its best now, but what about specific sectors, gold and Treasury bonds. Even during the “Best Six Months” there are still outperformers and underachievers. 
In the following table, the performance of the S&P 500 during the “Best Six Months” November to April 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.
[Various Sector Indices & 30-Year Treasury Bond versus S&P 500 during Best Six Months November-April Since 1990 table]
Using the S&P 500 as the baseline by which all others were compared, nine indices outperformed during the “Best Six Months” while seven underperformed based upon “AVG %” returned. At the top of the list is Biotech with average gains of 14.25% during the “Best Months.” But, before jumping into Biotech positions, only 20 years of data was available and in those years Biotech was up 70% of the time from November through April. Biotech’s current streak of six consecutive double-digit-winning “Best Six Months,” could be broken this time around as drug pricing has caught the eye of D.C. residents and want-to-be residents.
[Biotech mini-table]
Based purely upon “AVG %,” the second, third and fourth best are a virtual tie with gains all in the 10% range. Consumer Discretionary is arguable the best sector to own during the “Best Six Months” with a 10.69% average return and an 88% success rate. Transportation and Natural gas stocks also average better than 10%, but their success rates are slightly softer at 76% and 67% respectively. Natural gas stocks best months appear to be February, March and April, especially when it has been a long, unseasonably cold winter.
[Consumer Discretionary mini-table]
Other “Best Six” top performers are Materials, Industrials, Information Technology, Financials and NYSE ARCA Oil & Gas. All have bested the S&P 500 over the past 25 “Best Months” periods. Materials and Industries further one-up the broad S&P 500 with success rates of 88% compared to 84%. Just three losses in 25 periods is a remarkably solid record.
[Materials mini-table]
[Industrials mini-table]
It is also noteworthy to mention that the darlings of the “Worst Six Months,” Healthcare and Consumer Staples do continue to advance during the “Best Six Months,” just at a slower pace and with less consistency. Other laggards include Gold, Utilities, Gold & Silver stocks and Telecommunications. These laggards do produce average gains during the “Best Months,” but here again we see their success rates are not consistent and in the case of Gold & Silver stocks there have been more declines than advances.
The only outright loser was the 30-year Treasury bond during the “Best Six Months.” Its success rate is under 50% (more losses than wins) and its average and median moves are both negative. With stocks on the move higher during the “Best Months” it is not surprising to see defensive sectors, gold and bonds suffer.
One “Best Six Months” trading and investment strategy based upon this table would be to overweight Biotech, Consumer Discretionary, Transports, Materials and Industrials while underweighting Healthcare, Consumer Staples, Utilities, anything related to gold and silver (either the actual commodity or the stocks of companies that mine it) and bonds.