Best Performing Sectors of the “Worst Six Months”
By: Christopher Mistal
May 09, 2019
Today we are not going to bother debating whether one should actually sell in May or not. Instead, let’s focus on some tactical adjustments that can be made in portfolios to take advantage of what actually does work during the “Worst Six Months” while either shorting or outright avoiding what does not work all that frequently. 
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, 1990-2018, a full 29 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, five indices and the 30-year Treasury bond outperformed during the “Worst Six Months” while nine others and gold underperformed based upon “AVG %” return. At the top of the list are Biotech and Healthcare with average gains of 8.69% and 4.85% during the “Worst Months.” However, before jumping into Biotech positions, only 24 years of data was available and in those years, Biotech was up just 54.2% 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 29 years of data and a 65.5% success rate is probably a safer choice than Biotech. Its 4.85% 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). Although not the best sector by AVG %, Consumer Staples advancing 79.3% 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 29 years, shedding an average 2.04% during the “Worst Six.” PHLX Gold/Silver, NYSE ARCA Natural Gas and S&P 500 Industrials 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 37.9% 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 29 years. Only Biotech, 30-year bonds and gold (futures and gold & silver stocks) 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.
Sector Rotation ETF Trade: Consumer Staples
Based upon the above updated “Worst Six Months” Sector Performance, the Almanac Investor ETF Portfolios are headed in the correct direction with existing long positions in Healthcare, Utilities and bonds What is lacking is a position in Consumer Staples, the sector with the highest win ratio of them all during the “Worst Six Months.”
We have been trying to add SPDR Consumer Staples (XLP) to the Sector Rotation ETF Portfolio for some time now on a dip. Thus far this approach has not succeeded. Buy XLP with a buy limit of $56.90. For tracking purposes, XLP will be added to the portfolio using its average price on May 10.
[SPDR Consumer Staples (XLP) Daily Bar Chart]