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You don’t have to sell all of your stocks in order to take advantage of the U.S. stock market’s “Sell In May and Go Away” seasonal pattern.
Instead, shift your stock portfolio away from the market sectors most-sensitive to the pattern and into others that are relatively immune. Then you can participate in any gains the market produces this summer while protecting yourself from the full brunt of any losses.
Credit for first exploring this alternate approach, as far as I can tell, goes to two finance professors: Ben Jacobsen of the TIAS Business School in the Netherlands and Nuttawat Visaltanachoti of Massey University in Australia. Their 2006 study, entitled “The Halloween Effect in U.S. Sectors,” found that the seasonal sell-in-May pattern “is almost absent in sectors related to consumer consumption but is strong in production sectors.”
The investment implication of this finding is to create a sector rotation strategy that invests in the market’s production sectors from November through April and in the sectors related to consumer consumption from May through October.
Sam Stovall, chief investment strategist at CFRA Research, introduced a version of this strategy in his 2009 book, “The Seven Rules of Wall Street.” An exchange-traded fund based on that strategy was created in July 2018: The Pacer CFRA-Stovall Equal Weight Seasonal Rotation ETF
SZNE,
History is important here because this ETF has failed to beat the S&P 500
SPX,
since inception, gaining 10.1% annualized versus 10.4% for the S&P 500 (according to the ETF’s website).
Over longer periods, the strategy compares more favorably to buying and holding. We know because S&P Dow Jones Indices retroactively calculated the performance of the SZNE strategy and in that scenario it outperformed.
The chart above provides the details. It compares the total returns of the S&P 500, the original “Sell In May and Go Away” strategy that invests in T-Bills from May 1st through Halloween, and the index on which the SZNE ETF is based — the CFRA-Stovall Equal Weight Seasonal Rotation Index.
You can estimate what the real-world returns for the SZNE would have been over these periods by subtracting its expense ratio, currently 0.60% per year. This sector rotation strategy’s market-beating potential only appears when we expand our focus to include at least the past 20 years.
That’s a long time to wait before coming out ahead of the market. Still, if history is any guide, the sector-rotation approach for exploiting the “Sell in May and Go Away” pattern will come out ahead of the original version that goes to cash. So there appears to be strong historical support for “staying and playing” rather than selling and going away.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at [email protected]
More: Owning individual stocks is your best bet now, with the market stuck in ‘purgatory’
Also read: Even without an ‘earnings apocalypse,’ stocks still need to drop 15%, says strategist
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