ETF Trades: Best Performing Sectors of the “Worst Six Months” By: Christopher Mistal | May 05, 2022 | Email | Print

Let’s put aside the market’s recent volatility for a moment and instead focus on some tactical adjustments that can be made in portfolios to take advantage of what has actually worked during past “Worst Six Months” while considering either shorting or outright avoiding what does not work all that frequently.

 

In the following table, the performance of the S&P 500 and NASDAQ 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, 1990-2021, a full 32 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, five indices and the 30-year Treasury bond outperformed during the “Worst Six Months” while ten others and gold underperformed based upon “AVG %” return. At the top of the list are Biotech and Information Technology with average gains of 7.57% and 5.38% during the “Worst Months.” However, before jumping into Biotech positions, only 27 years of data was available and, in those years, Biotech was up just 55.6% 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, Information Technology with 32 years of data and a 71.9% success rate is probably less risky choice than Biotech. Its 5.38% AVG % performance comes by way of three fewer losses in five additional years of data. However, five of the nine losses were double digit. The worst loss was 30.88% in 2008. Other double-digit losses were in 1990, 2000-2002. Given this year’s NASDAQ weakness, it is likely best to avoid Information Technology this time around.

 

 

Other “Worst Six” top performers consisted mostly of the usual suspects when defensive sectors are considered. Healthcare, Consumer Staples and 30-year Treasury bonds all bested the S&P 500. Not surprisingly NASDAQ also performed well, advancing 75% of the time with an average gain of 5.12%. NASDAQ’s Best Eight Months include May and June, so it does have an advantage. Although not the best sector by AVG %, Consumer Staples advancing 81.3% of the time is the closest thing to a sure bet for a gain during the “Worst Months.” Of the six Consumer Staples declines over the last 32 years, only in the bear market years of 2002 and 2008 did the sector suffer a double-digit decline.

 

 

At the other end of the performance spectrum we have the sectors to consider shorting or to avoid altogether. The NYSE ARCA Natural Gas sector was the worst over the past 32 years, shedding an average 1.07% during the “Worst Six.” S&P 500 Materials was second worst by average performance, off 1.06%. NYSE ARCA Oil & Gas also recorded an average loss. 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 40.6% of the time. Aside from solid gains in 2012, 2019 and 2020, PHLX Gold/Silver has declined in eight of the last eleven “Worst Six Months.”

 

 

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 32 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. Historically speaking, 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.

 

 

While considering the above and reviewing the current holdings of the Sector Rotation portfolio, updated with yesterday’s close we will look to establish a new position in SPDR Consumer Staples (XLP). The existing position was sold on April 21 when it traded above its Auto-Sell price of $80.53 for an 18.7% gain. A new position in XLP can be considered on dips below $75.01. If purchased an initial stop loss of $70.00 is suggested.

 

Additionally, we will add to the existing position in SPDR Utilities (XLU), the second-best sector during the “Worst Months” based upon frequency of gains. XLU can be considered on dips below $68.44. If purchased set a stop loss at $65.00.

 

First Trust Natural Gas (FCG) was another good trade for the portfolio. FCG traded above its Auto-Sell price on April 18 of $26.97 and was subsequently closed out for a gain of 36.6%. Natural gas has surged in recent months, but it appears momentum is fading. The associated favorable Sector Seasonality also comes to an end in early June.

 

Given the weak backdrop of April this year, it is not surprising that two other positions were recently closed out. GlobalX Copper Miners (COPX) was stopped out on April 22 when it closed below its stop loss. Excluding any dividends and trading costs, COPX logged a 5.9% gain when sold. iShares DJ US Tech (IYW) was also stopped out in April. Tech has been leading the market lower essentially all year long after leading it higher throughout 2020 and 2021. IYW was closed out for a loss of 8%. SPDR Technology (XLK) has held up modestly better and is on Hold.

 

In hindsight, we were obviously early to start accumulating a position in SPDR S&P Biotech (XBI). It was off sharply again today and at today’s close it has effectively given back all of its gains since March/April 2020. Rising interest rates are likely to make it more challenging for many of the development stage companies held by XBI, but we are going to maintain a longer-term timeframe. XBI is on Hold.

 

 

 

Yesterday’s gain provided a small, yet brief reprieve to the portfolio following the disastrous results of April. The earliest NASDAQ’s (and Russell 2000) “Best Eight Months” can officially end is on June 1. In recent years these positions have been underwater at some point during the “Best Months” only to rally and record a gain. Most recently, the “Best Months” of 2019-2020, but before that there was also 2018-2019 and in 2015-2016. Although the window for a rally is closing, there is still a window. QQQ and IWM are on Hold.

 

Treasury bond yields are ahead of Fed rate hikes and could easily reach a peak before the Fed finishes increasing its rate. Recession concerns could also quickly halt and reverse bond ETF weakness. TLT, AGG and BND are on Hold.