Top Sectors for Surviving the “Worst Six Months”
By: Christopher Mistal
May 10, 2018
Today 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 or sub-indices, gold and the 30-year Treasury bond. Nine of the fourteen indices chosen are S&P Sector indices. Gold and 30-year bond are continuously-linked, non-adjusted front-month futures contracts. With the exception of two indices, 1990-2017, a full 28 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 Worst Six Months May-October Since 1990 table]
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 9.00% and 4.74% during the “Worst Months.” However, before jumping into Biotech positions, only 23 years of data was available and in those years Biotech was up just 52.2% of the time from May through October. Some years, like 2014, gains were massive while in down years losses were frequently nearly as large.
[Biotech mini-table]
Runner-up, Healthcare with 28 years of data and a 66.2% success rate is probably a safer choice than Biotech. Its 4.74% 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.
[Healthcare mini-table]
Other “Worst Six” top performers consisted mostly of the usual suspects when defensive sectors are considered. Consumer Staples, 30-year Treasury bonds 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). With a 12.9% gain during the last “Worst Six Month” period, Financials also outperform the S&P 500 now. Although not the best sector by AVG %, Consumer Staples advancing 78.6% of the time is the closest thing to a sure bet for a gain during the “Worst Months.” 
[Consumer Staples mini-table]
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 28 years, shedding an average 1.84% during the “Worst Six.” PHLX Gold/Silver and NYSE ARCA Natural Gas 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 39.3% of the time.
[PHLX Gold/Silver mini-table]
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 when 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 28 years. Only Biotech, 30-year bonds, gold (futures and gold & silver stocks) and Utilities manage to post gains in both August and September.
Based upon % Up during the “Worst Six Months,” Consumer Staples and Utilities look like the best place to be while Gold/Silver mining stocks (XAU) and Materials could be shorted or avoided all together. May also 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.
ETF Trade: Consumer Staples
Based upon the above updated “Worst Six Months” Sector Performance, the Almanac Investor ETF Portfolio is headed in the correct direction with existing long positions in Healthcare, Utilities and bonds alongside short positions in Transports, Gold Miners (through JDST, an inverse ETF) and Materials. What is lacking is a position in Consumer Staples, the sector with the highest win ratio of them all during the “Worst Six Months.”
SPDR Consumer Staples (XLP) is an excellent fund to consider filling this void. Top Five holdings of XLP consist of long-established and well-known brands, Procter & Gamble, Coca-Cola, PepsiCo, Philip Morris and Walmart. XLP also has a dividend yield right around 3%.
[SPDR Consumer Staples (XLP) Daily Bar Chart]
In the above chart it is evident that XLP has been under heavy pressure this year, down 12.9% year-to-date at yesterday’s close. A brisk move by 10-year Treasury yields up towards 3.0% has been one of the key driving forces for the decline in the staples sector. The brisk move in Treasury yields could be over. Today’s CPI was less than expected as inflation cooled in April. XLP could be considered around current levels with a buy limit of $49.70. If purchased an initial stop loss of $45.00.