Market Seasonality

Posted on 05/06/2011

In Monday's article we quickly mentioned the old market adage "Sell in May and Go Away", which perhaps is more commonly known as Market Seasonality.  The idea is that the six month period beginning May 1st and going through the end of October is a historically weak period in the market.  Based on the study we have done, a theoretical $10,000 initial investment in 1950, on a compounded basis, is actually now down during the May 1 to October 31 period using data through Oct. 31, 2010.  On the other hand, in looking at the seasonally strong period between November 1 and April 30 each year, an identical $10,000 initial invetment grew to $609,852 at an average annual rate of 7.00% on a compounded basis.  This is one of those market adages that actually has a distinct historical bias to it; however, a market adage is not enough to base a portfolio management decision on entirely.  One thing that we know is that stocks, sectors, and asset classes rotate in an out of season within the financial markets, and no matter what, there will always be areas of opportunity.

With that said we wanted to look at some of the different sectors of the equity market in order to see if there exists a historical bias towards the returns of sectors as well as other asset classes, and the results were rather interesting.  For starters, we must say that even during the seasonally "weak" period in the market from April 30th to October 31st, 7 out of the 10 economic sectors averaged a gain, leaving just just 3 that averaged a loss.  Furthermore, all 10 of the broad economic sectors averaged a positive return over the past 11 years during the seasonally strong period in the market (October through April).  However, the magnitude of those gains during the seasonally strong period was much greater than the gains that were seen during the seasonally weak period in the market.  Additionally, the average return of the sectors during the seasonally strong period in the market always outperformed the average return for that sector during the seasonally weak period in the market.  To say all of this another way, it certainly appears there is "market seasonality" that exists within individual sectors of the market, specifically in terms of the magnitude of these gains.

Below we have created a visual for all of this sector seasonality information.  In the chart you will see the average return of 3 representative indices from each of the 10 broad sectors during both the seasonally strong 6-month period in the market as well as the seasonally weak 6-month period in the market.  The green bar represents the average return during the seasonally strong six month period while the red or pink bar represents the average return of the asset class during the seasonally weak period in the market.  For instance, with respect to the Basic Materials sector, this sector saw an average return of 12.26% over the past 11 seasonally strong periods in the market while the average return for the seasonally weak periods in the market was -0.23%.  Here are some observations from the "Sector Seasonality Study."

Observations of Market Seasonality, Sector Style:

  • All 10 sectors have averaged a gain during the seasonally strong six month period in the market.
  • During the seasonally strong 6-month period in the market there are three sectors that have averaged double digit gains including Energy (15.00%), Basic Materials (12.26%), and Consumer Cyclical (10.37%).
  • The worst performing sector during the seasonally strong 6-month period has been Telecom, which is basically flat.
  • Seven out of 10 sectors averaged a gain during the seasonally weak 6-month period in the market, and only 3 have averaged a loss including Telecomm (-3.14%), Consumer Cyclical (-2.36%), and Basic Materials (-0.23%).
  • The Healthcare sector has been the best performing sector during the seasonally weak 6-month period beginning May 1st with an average return of 3.53% followed closely by Energy which has seen an average return of 3.04% during the seasonally weak 6-months in the market.

Market Seasonality

The table below lists the components that we used to represent each of the ten broad sector.  Each sector consists of a Dorsey Wright Index along with two other sector-based ETFs.  In addition, we have shown the average gains/losses of those sectors during the strong six-month period versus the weak six-month period.  All of these observations are not limited to opportunities in just the equity space as there are ETFs out there that provide you exposure to various sectors as well.  The ETF Xray page is a great resource to search for ETFs that have exposure to a particular sector.

Legend of Market Seasonality

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Symbol Performance
JO 58.802%
CAFE 54.459%
SCIF 53.912%
SCIN 43.433%
SILJ 42.612%
SMIN 41.941%
GLDX 41.091%
INXX 37.500%
JJN 36.135%
NINI 34.516%
GGGG 32.607%
Sector Symbol Performance
Basic Materials SILJ 42.612%
Energy MLPX 23.162%
Financial REZ 21.303%
Technology XSD 19.277%
Healthcare FBT 18.430%
Utilities RYU 15.322%
Industrial IYT 14.784%
Consumer Noncyclical FXG 11.862%
Telecommunications VOX 6.168%
Consumer Cyclical PEZ 3.617%

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