Skip to main content

The Globe and Mail

Survive summer’s volatility by betting on lower-risk sectors

During the past week, the media have focused on the "Sell in May and go away" strategy for North American equity markets. The strategy assumes that equity markets move lower from the end of April to the end of October. Therefore, investors should avoid equity market participation during this period. On the surface, the strategy sounds simple, but is it really justified?

The first look at long-term returns for the S&P 500 index suggests that the strategy makes sense. According to EquityClock.com, a portfolio invested in the S&P 500 index starting with $10,000 increased in value to $1,051,264 by April 30, 2014 simply by buying the index each year on Oct. 28 and selling the index on May 5 over the past 30 years. In contrast, value decreased to $9,978 when an investor with $10,000 purchased the index each year on May 5 and sold the index on Oct. 28. Commission costs and dividends were not included in the calculation. The buy-and-hold value of the portfolio as of April 30 2014 would have been $1,048,970, not far off from the strategy of selling at the start of May and buying back into the equity market in the fall.

The propensity for gains during the October through to May period seems obvious, however, a negative equity market bias during the summer months may not be a successful trading strategy. During the past 64 periods, the S&P 500 index gained in 51 periods and declined in 13 periods from Oct. 28 to May 5. Conversely, the index rose in 40 periods and declined in 24 periods from May 5 to Oct. 28.

Story continues below advertisement

Annual recurring events are key to market performance. From October through to May, a series of annual recurring events have a favourable impact on equity markets, including seasonal economic data, tax related events, annual meetings, annual reports, industry specific events, and holidays. From June through to September, annual recurring events influencing equity markets are less frequent, trading activity normally is lower, and volatility is higher. In other words, equity market strength becomes random from May 5 to Oct. 28. The data also shows that the largest gains during the year historically have happened between Oct. 28 and May 5 and the largest losses during the year historically have occurred between May 5 and Oct. 28.

Investors can hedge out portfolio volatility and remain invested in equity positions by focusing on defensive sectors that offer lower risk. Defensive sectors less impacted by market volatility, such as consumer staples, health care, utilities, and telecom have a history of outperformance during the seasonally weak period for stocks. Opportunities in energy, agriculture, REITs, and gold stocks are also available to keep portfolios in the positive column as broad market benchmarks stagnate during the summer months. Cyclical sectors most influenced by the economy, including industrials, materials, and consumer discretionary, are vulnerable during the May 5 to Oct. 28 period. Owning outperforming sectors instead of a full investment in equity markets is a preferred strategy during the May 5 to Oct. 28 period.

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 Investment 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 Investment Management (Canada) Inc.

Report an error
About the Author

Don Vialoux is the author of free daily reports on equity markets, sectors, commodities and Exchange Traded Funds. He is also a research analyst for JovInvestment Inc. Reports are available at www.timingthemarket.ca and www.equityclock.com. Follow him on Twitter @EquityClock. More

Comments

The Globe invites you to share your views. Please stay on topic and be respectful to everyone. For more information on our commenting policies and how our community-based moderation works, please read our Community Guidelines and our Terms and Conditions.

We’ve made some technical updates to our commenting software. If you are experiencing any issues posting comments, simply log out and log back in.

Discussion loading… ✨