|
|
Get Four
|  | MAY 4, 2005
 SAM STOVALL'S SECTOR WATCH By Sam Stovall Sell in May, But Don't Walk AwayStocks do tend to do better in November to April, but shifting to defensive sectors in May to October may be a profitable tacticA Wall-Street adage tells investors to "sell in May, and then walk away." What does that mean? Stock-price movements historically have been stronger in the November-April period, compared to the May-October stretch. The message implicit in the old market chestnut is that investors move into cash in May, steering clear of a typically weak period for equities, and back into stocks in November, when prices usually begin to bounce back. 
A survey of the S&P 500 stock index's price action from May, 1945, through April, 2005, shows the old saying may have some merit -- but it doesn't necessarily hold true for every segment of the market, as we shall see. While the S&P 500 advanced an average of 7% during the November-April period over that span (without dividends reinvested), it posted an average gain of only 1.5% from May through October. What's more, the November-April period outperformed May-October 69% of the time. CASH INFUSIONS. The adage worked in 2004 (the S&P 500 gained 5.4% from Oct. 31, 2003 through Apr. 30, 2004, vs. a 2.1% advance for the index from Apr. 30, 2004 through Oct. 31, 2004), as it has in five of the six previous years. Based on the 2% decline in April for the S&P 500 index (and more than 4% drop for the year), however, it appears that some investors began "walking away" a bit earlier this year. History shows that the S&P 500's worst month is September, while the worst three-month period is the third quarter. In S&P's opinion, this is because analysts typically reduce their full-year earnings estimates as third-quarter results are about to be released. October is historically a month in which the market establishes a bottom, so the S&P 500 enters November at a fairly low level compared to other months. This gives the November-April period the advantage of starting at a low base. The November-April stretch also includes two periods of large cash infusions into the market: January, when pension funds typically put a lot of money to work, and April, when many individuals add to their IRAs. November is also around the time of year when analysts start looking ahead by five quarters, rather than just focus on the final one or two. LOOKING BACK. Have S&P 500 sectors experienced a similar skewing of performances? Over the past 15 years (the most available for S&P 500 global industry classification standard sector data), it appears that they've also seen a pronounced seasonal pattern. The table below shows simple average price changes (without dividends reinvested) during the two six-month periods for sectors in the S&P 500 from April, 1990, through April, 2005, along with their frequencies of outperformance. The latter measure helps identify those sectors whose average performances may have been skewed by one or two stellar periods. As with the overall market, the table shows that most sectors have seen their best results in the November-April period (those with a frequency of outperformance of 67% or better have been highlighted). On average, none of the groups posted negative results during the November-April interval, while two sectors posted average declines in May-October. S&P 500 Sector Average Performances (Price Only) and Frequencies of Market Outperformance: April, 1990 to April, 2005
This study shows that a market timer probably wouldn't bother taking a long position in the S&P 500 from November-April and then move into cash during May-October, since the full-year return, after commission costs, would likely be substantially worse than staying in the S&P 500 all year long. WORTH THE EFFORT. Yet an investor who was long on the market from November to April but then adopted a defensive approach by rotating into either the S&P consumer-staples or health-care sectors during May through October, would have found -- as can be seen in the chart below -- that the returns were worth the effort. 
The 15-year compound annual growth rate for the S&P 500 was 8.7% (without dividends reinvested). Owning the S&P 500 from November through April and then rotating into the S&P consumer-staples sector from May through October would have returned 12.5% per year. What's more, a similar rotation approach that substituted health care for consumer staples would have returned 13.3% on average. Had an investor rotated into either the S&P consumer-staples or health-care sectors, rather than cash, from May to October, he would have improved his returns by 44% to 53%. We note that past performance is not necessarily a guide to future results. But if investors were to look for companies in the consumer-staples and health-care sectors that currently have favorable fundamental outlooks, what would they find? The following table lists five stocks in each sector that carry 5 STARS (strong buy) recommendations from S&P analysts.
Industry Momentum List Update For regular readers of the Sector Watch column, here is this week's list of the industries in the S&P 1500 with Relative Strength Rankings of "5" (price performances in the past 12 months that were among the top 10% of the industries in the S&P 1500), and their proxies (the highest STARS-ranked companies in the sub-industry index -- tie goes to the largest market value) as of Apr. 29, 2005.
Required Disclosures 5-STARS (Strong Buy): Total return is expected to outperform the total return of the S&P 500 Index by a wide margin, with shares rising in price on an absolute basis. 4-STARS (Buy): Total return is expected to outperform the total return of the S&P 500 Index, with shares rising in price on an absolute basis. 3-STARS (Hold): Total return is expected to closely approximate the total return of the S&P 500 Index, with shares generally rising in price on an absolute basis. 2-STARS (Sell): Total return is expected to underperform the total return of the S&P 500 Index and share price is not anticipated to show a gain. 1-STARS (Strong Sell): Total return is expected to underperform the total return of the S&P 500 Index by a wide margin, with shares falling in price on an absolute basis. As of March 31, 2005, SPIAS and their U.S. research analysts have recommended 30.9% of issuers with buy recommendations, 56.6% with hold recommendations and 12.5% with sell recommendations. All of the views expressed in this research report accurately reflect the research analysts' personal views regarding any and all of the subject securities or issuers. No part of the analysts' compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. Additional information is available upon request to Standard & Poor's, 55 Water Street, New York, NY 10041. Other Disclosures This research report was prepared by Standard & Poor's Investment Advisory Services LLC ("SPIAS"), and may have been provided to you either by: (i) Standard & Poor's under a license agreement with The McGraw-Hill Companies, Inc., which holds the copyright to this report; or (ii) a Standard & Poor's client who is granted a sub-license by Standard & Poor's. This equity research report and recommendations are performed separately from any other analytic activity of Standard & Poor's. Standard & Poor's equity research analysts have no access to non-public information received by other units of Standard & Poor's. Standard & Poor's does not trade in its own account. SPIAS is affiliated with various entities, which may perform services for companies covered by the recommendations in this report. Each such affiliate is operationally independent from SPIAS. Disclaimers This material is based upon information that we consider to be reliable, but neither SPIAS nor its affiliates warrant its completeness or accuracy, and it should not be relied upon as such. Assumptions, opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation of particular securities, financial instruments or strategies to you. Before acting on any recommendation in this material, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice.  Stovall is chief investment strategist for Standard & Poor's All of the views expressed in this research report accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of analyst compensation was, is or will be, directly or indirectly related to the specific recommendations or views expressed in this research report. Standard & Poor's Regulatory Disclosure Any advice, analysis, or recommendations contained in articles labeled "Insight from Standard & Poor's" reflect the views of Standard & Poor's, which operates separately from and independently of BusinessWeek Online. It is possible that BWOL may from time to time publish information that is not consistent with advice, analysis, or recommendations that are published by Standard & Poor's. Standard & Poor's and BusinessWeek Online are each units of The McGraw-Hill Companies, Inc.
BW MALL
SPONSORED LINKS
Get BusinessWeek directly on your desktop with our RSS feeds.
Buy a link now! Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
 Copyright 2005, by The McGraw-Hill Companies Inc. All rights reserved.Terms of Use | Privacy Notice |
Printer-Friendly Version
