The month of June often is a difficult month for equity investors on both sides of the border. What are the prospects this year?
Performance by major North American equity indexes in the month of June has not been good relative to performance in other months of the year. Since 1980, June has been tied for the third worst performing month for the S&P 500 index and the second worst performing month for the S&P/TSX composite index. The worst month for all major North American equity benchmarks is September. Performance has been particularly cruel during the past 10 years. On average, the S&P 500 index fell 1.3 per cent, the Nasdaq composite index gave up 1 per cent, and the S&P/TSX composite index lost 1 per cent.
Sectors most impacted in June were economically sensitive sectors. Data for the past 20 years shows the weakest sectors in order of significance were materials, financials, and consumer discretionary. All fell by at least 1 per cent, on average, through the month. Two sectors averaged gains: health care and technology.
A reason for weakness is a tendency by investors to spend more time planning holidays than planning to adjust their portfolios. Volumes in equity markets traditionally start to slow in June and remain below average into the summer months. In addition, many companies, particularly in the manufacturing and materials industries, slow production during the summer months to fit into holiday schedules.
What about this year? The S&P/TSX composite index is already showing signs of technical deterioration. The index reached a seasonal peak on May 2 at 14,765.15. Subsequently, the index has underperformed the S&P 500 and drifted below its 20-day moving average. In addition, short term momentum indicators, including Stochastics, relative strength index, and moving average convergence/divergence, are trending down. A break below support at 14,473.78 will complete a double top pattern. Seasonal influences also turn weaker in June.
The S&P 500 index and Dow Jones industrial average have a better technical profile, but are not without technical concerns. The S&P 500 reached all-time highs on each trading day last week and the Dow is testing its all-time high at 16,735.51 set on May 5. Technical indicators currently are overbought. Strength in U.S. equity indices has been fueled by encouraging economic news following a recovery from weather-related weakness in the first quarter. However, strong reports released in the month of May have led to unrealistic expectations for month-over-month reports released in June. Key U.S. reports released this week including May ISM, April trade deficit, and the May employment report will clarify expectations for economic growth in the second half of 2014.
Preferred approach for investors following a seasonal strategy is to reduce equity exposure in North American equity markets. If technical deterioration by major equity indexes increases, investors may consider introducing short positions in economically sensitive sectors to offset existing long positions.
Disclaimer: Comments, charts and opinions offered in this report by www.timingthemarket.ca and www.equityclock.com are for information only. They should not be considered as advice to purchase or to sell mentioned securities. Data offered in this report is believed to be accurate, but is not guaranteed. Don and Jon Vialoux are Research Analysts with Horizons ETFs Management (Canada) Inc. All of the views expressed herein are the personal views of the authors and are not necessarily the views of Horizons ETFs Management (Canada) Inc., although any of the recommendations found herein may be reflected in positions or transactions in the various client portfolios managed by Horizons ETFs Management (Canada) Inc.
Follow Don Vialoux on Twitter: