Like so many investment sayings, there’s truth to the “Sell in May and go away” adage… and many caveats. Ultimately, your decision to follow or ignore this market-timing strategy depends on how you invest and protect capital.
Buy-and-hold investors might do well to heed the advice.
But for other investors, particularly those of us who employ active and statistically sound strategies, “sell in May” isn’t the most useful advice, as short-term opportunities to profit will continue to present themselves.
My in-depth analysis of sector-specific cycles, trends and seasonality has shown that making short-term tactical plays on individual sectors is superior to a passive buy-and-hold approach.
That’s the foundation of Cycle 9 Alert — where we make targeted investments in favored sectors for two to three months at a time.
Interestingly, while the period between May and October often produces lackluster returns for investors who are fully invested in the broad market (as Harry discussed above), there are specific sectors that actually outperform during these months.
I’m talking about defensive sectors — namely Consumer Staples and Health Care.
I recently ran across a chart put together by S&P Capital IQ that shows the value of rotating into defensive sectors in May… instead of simply “going away.”
The strategy is super simple:
- Own the S&P Small Cap 600 Index… between November and April
- Own the Consumer Staples and Health Care sectors… between May and October
This strategy has outperformed buy-and-hold over the last 20 years. Take a look at this chart, which shows “buy-and-hold” on the left and what I’ll call the “defensive-rotation strategy” on the right.
As you can see, the defensive-rotation strategy produced a better annual return (13.7% vs. 10.4%) and with less volatility (19.9% vs. 21.3%).
Higher returns with lower volatility is always a trade-off worth taking!
So if you’re looking to take the summer off… you can consider following this strategy simply by buying equal dollar amounts of the S&P Select Consumer Staples SPDR Fund (NYSE: XLP) and the S&P Select Health Care SPDR Fund (NYSE: XLV).
Or for a more active approach to identifying favored sector trends, take a look at Cycle 9 Alert.