Although I did not write about the Dupont trade very much in the last few months, Dupont has a strong seasonal period from January 28th to May 5th. Judging by the feedback I have received, it seems that a lot of investors have taken advantage of the seasonal trade. This year, it started off as a market perform trade, rising with the market. In late April, Dupont came out with very strong earnings that beat analyst estimates and the stock rocketed upwards, strongly outperforming the S&P 500. From a seasonal basis, on average Dupont starts to underperform the stock market once it ends its seasonal period (May 5th). This downward trend persists until the end of the year. Investors should consider taking profits at this time.
I have always advocated using the consumer switch strategy – investing in the consumer staples strategy from April 23rd to October 27th and switching to the consumer discretionary sector for the other part of the year. The strategy has been very successful, including this year with the consumer discretionary sector outperforming the consumer staples from October 28th to April 22nd. I often choose the consumer staples sector as a top pick for the summer months. This year, is no different. Despite the strong outperformance of the consumer staples sector in the spring months the consumer staples sector is still a core holding for the summer months. Investors should expect that this sector will underperform when the market is rising on the back of cyclicals and outperform when cyclicals are underperforming. Yes, the consumer staples sector is trading at a 17.7 forward P/E multiple, which is expensive for the sector, but over the next six months it is still a favoured sector.
The biotech sector starts its seasonal trend on June 23rd and lasts until September 13th. The performance of biotech stocks is driven partly by conferences which tends to bring interest to the sector. With autumn being a busy time for biotech conferences, investors can drive the price of biotech stocks up in the late summer months. Typically, the biotechnology sector performs poorly in the spring months, but this year the sector started to perform well at the beginning of March. More recently, it has been performing at market.
At this point it is best to wait for the start of the seasonal trade on June 23rd before entering a position.
A lot of writers have discussed how the days around American holidays tend to be positive, including Memorial Day. The basic premise behind this trade is that institutional trader activity subsides significantly around the holidays and the optimistic, retail investors have more sway over the markets and push the markets higher. This includes the days before and after Memorial Day. I have stretched the Memorial Day Strategy Trade out to include the first five days of June. The reason is that typically the best time of the month to invest in the stock market is the last few days of the month and the first few days of the next month. I have developed a strategy that encompasses this phenomenon, called the Super Seven. As Memorial Day occurs towards the end of the month, it makes sense to put the two typically positive seasonal trends together.
There are two ways to take advantage of the Memorial Day seasonality. First, investing in a S&P 500 ETF for the full period from two trading days before Memorial Day to five trading days into June. Second, for Canadians only, investing in a TSX Composite ETF at the end of the day before Memorial Day and selling it at the end of Memorial Day when the U.S. markets are closed. The performance of Canadian markets during American holidays tends to be strong. As a result, I have developed a strategy called “Canadians Give Three Cheers for American Holidays” . Of course both strategies can be used.
How successful are the strategies? Since 1971 (in 1971 Congress passed the National Holiday Act, recognizing Memorial Day as the last Monday in May), the Memorial Day strategy has been successful 64% of the time, producing an average 1.1% gain. During this period, there have been some large gains and some large losses. Most recently, over the last ten years the strategy has only been successful four times, but the overall gains outweighed the losses. It seems that if the first part of May is weak, the sentiment can carry over at the end of the month. This has been the case in the last two years. So far the S&P 500 has been strong at the beginning of May. A correction into the start of the Memorial Day strategy would set up the trade nicely.
Using the “Canadians Give Three Cheers for American Holidays”. the memorial day strategy has been very successful. Since 1977 the success rate has been 80%, with an average gain of 0.4%. The seven drawdowns have all been much smaller than the average gain, making this an excellent short-term trade.
Although the broad market is on average weak during the six month unfavourable period, there are pockets of outperformance. The Memorial Day strategy trade is one of the trades that investors should look to garner some extra profits during the summer months.
Government bonds typically perform well from May 6th to October 3rd, in both Canada and the U.S., with the real sweet spot of the trade occurring in August and September. Using the Barclays 7-10 U.S. Government Bond Total Return Index, the trade has produced an average gain of 4.8% and has been positive 77% of the time. The sector can get an early start when equity markets are in trouble, and it often starts its rise two weeks after the market tops. Government bond sector outperformance during its seasonally strong period makes sense from a market rotation perspective. When the stock market fades as it often does in the late spring, investors use their proceeds to buy bonds. In autumn, as the stock market tends to rise, investors sell their government bonds to invest in stocks.
Currently, the government bonds market is off to a rocky start as cyclical stocks have put in a brief spat of strong performance and there is some discussion of how and when the Fed is going to reduce their current quantitative easing program. On May 11th, Wall Street Journal’s Jon Hilsenrath published a much anticipated possible framework on how the Fed might start to reduce its bond buying. Somehow it seems that Hilsenrath has inside information on the Fed’s plans, as his predictions often come to fruition.
Even so, the framework that Hilsenrath presents does not include any time lines. The recent discussion of the Fed possibly buying fewer bonds has hurt the bond market.
Nevertheless, given the current weakening economic climate, it is going to be difficult for the Fed to take its foot off the gas pedal. Also, with Japan and Europe increasing liquidity into their markets, if the Fed starts to take the opposite tact, then the USD will strengthen, which will in turn decrease their exports and increase their trade deficit and ultimately hurt the American economy. It is going to be difficult for the Fed to start withdrawing liquidity.
Overall, despite their low yield, government bonds are still a favourable seasonal investment. If poor economic numbers continue to be released, investors will once again be attracted to the bonds. Yes, the April non-farm payroll employment number was favourable, but recently, most economic reports from around the world have been less than favourable. If we continue to have falling inflation, falling PMIs, falling GDP growth, the discussion will once again return to deflationary expectations.
From a technical perspective, government bond sector, represented by the iShares 7-10 year Treasury Bond ETF (IEF), has a downside target of 105 which is the bottom of the trading range over the last year. Recently, IEF broke above its trading channel, but then corrected sharply back to 107.33, which is just below its 50 day moving average. It is possible that there is some short-term weakness ahead, but overall over the next five months the trade is expected to be favourable.
As mentioned last month, HAC entered into a long CAD trade in mid-March. The technicals supported an early entry into this trade. Typically, the Canadian dollar performs well in April. For the first part of April, the Canadian dollar corrected relative to the USD. In the second half of the month, the CAD soared as the USD fell and commodities rose. In the end, the trade was once again successful. More recently, the USD has once again been garnering strength, pushing the Canadian dollar down. If seasonal investors are not already out of this trade….they should be.
The energy sector trade ended on May 9th. Over the last three years this seasonal trade has struggled, including this year. In my earlier newsletters, I pointed investors to invest in the U.S. energy sector as it was a better opportunity than Canada. The trade typically starts on February 25th, but this year it started earlier in January. At the beginning of its seasonal period, the technicals looked good for the Energy Select Sector SPDR (XLE), but the sector soon after faltered. Overall, the trade produced a positive result in the U.S., but underperformed the S&P 500. Not good enough. In Canada, using the S&P/TSX Capped Energy Index Fund (XEG) produced a loss.
HAC started investing in the energy sector in January, concentrating on U.S. holdings. The sector started to underperform the S&P 500 when it should have been outperforming. As a result, HAC started to exit the sector well before the seasonal end date. The good news is that HAC rolled the proceeds back into S&P 500 ETFs to participate the rising broad market.
The energy sector showed fairly strong performance towards the end of its seasonal period in late April and the beginning of May, but as it has not shown steady outperformance relative to the S&P 500, and the seasonal period has ended, the best strategy for seasonal investors at this time is to exit the sector. The energy sector has another seasonal period in late July, warranting an early entry in late June if the technicals support an early entry. It is best to revisit this sector at that time.
Over the last few months I have been writing about the seasonal and technical picture of gold bullion, even though we are not in the seasonal period for gold. There seems to be so much interest in the subject, how could I not address the topic? To continue where I left off last month… gold was sitting on the $1550 support line at the time. Given that we were not in a strong seasonal period for gold, there was significant risk on the downside if the $1550 line was broken. Shortly after the release of my newsletter, there were whiffs of deflation as PMIs around the world seemed to be falling below expectations. At that time, Goldman Sachs came out with a recommendation to sell gold short. There was no question that gold was vulnerable to a correction – and correct it did.
So where are we now….still outside of the seasonally strong period for gold. Gold bullion’s seasonal period is from July 12th to October 9th. Given that an investment can be made in this sector on a seasonal basis a month early, based upon strong technicals, it is best to let gold bounce around for the next month. At this point, gold could increase or decrease. It is best to wait until there is a seasonal tailwind to help push the price of gold up. Next month the conversation will be much more interesting.