Consumer Staples Outperforms Apr 23 to Oct 27

The consumer switch strategy essentially rotates between the consumer discretionary and staples sectors.  During the favorable six months the consumer allocation is placed in the discretionary sector and during the unfavorable six months it is placed in the staples sector.  The switches are continue every April 23rd and October 27th.  This strategy has worked very well over the long-term. The results of the last two time periods are shown below.  We are approaching the date to switch into the staples sector (April 23).

Consumer Staples – From April 23 to Oct 27

We are approaching the switch date to buy into the staples sector. In the U.S. investors should consider using the ETF, XLP.

Last year the staples and discretionary sectors were flat into June, it is only in the bad summer months that the staples sector outperformed. Although the staples sector was down 20% in late October, this was better than the market’s drop (S&P 500) of 35% and the discretionary’s sector drop of 39%.

Consumer Discretionary – From Oct 27 to Apr 23

Over the last cycle the consumer staples sector has outperformed and underperformed the more conservative staples sector.

It has largely depended on the direction of the market.  When the market was heading higher, the discretionary sector outperformed.  When the market was heading lower the staples sector outperformed.  Since the last rally in early March the discretionary sector has outperformed by more than 12%.

As the strategy runs from January 21st to April 27th, investors should start legging out of the position.

The materials sector typically does well from January 29th to May 6th. So far the sector has outperformed the S&P 500 by approximately 9%.

Investors should follow this sector closely with the seasonal exit date approaching.  This sector typically pulls off in late spring and early summer. If the drums start beating louder that economy is slowing down, this sector will under-perform.

In February it was told once again to put forward the investor’s favorite seasonal trade: oil. Almost right on que oil stocks started to rise at the beginning of March. Although the sector is lagging the S&P 500 slightly, April is typically a strong month for the energy sector.

The sell date for this seasonal trade is May 9th. Although this sector can continue to run after seasonal period, oil stocks tend not to do well in the late spring/early summer. Last year in May 2008, investors were told that they should consider taking profits in this sector. At the time oil was trading at approximately $130 a barrel.

In January, it was stated from a source that platinum as an ideal seasonal opportunity: its seasonally strong period starts in January, its price relative to gold had been almost cut in half, and platinum had overreacted to the drop in auto sales. Platinum has done extremely well and has outperformed the S&P 500 by 33%.

The sell date for the platinum trade is May 31st.  Investors should start to consider legging out of the sector at the beginning of May.

In the next couple of days, I will be talking about the market sectors for the next couple of months.  Stay tuned.

We have just finished the month of March with an incredible run for the month of 8.5%. For the S&P 500 this is the best March ever. The market bottomed on March 9th @ 677. From the bottom, the market has risen 25%. Is this strong run over? Probably not – April is earnings month and the market tends to do well. Historically, April has been one of the best months of the year. From 1950 to 2008 the S&P 500 has produced an average return of 1.4% and has been positive 68% of the time. Over this time period it is ranked the third best of all of the months.

Most of the gain for April occurs during the first eighteen days. Historically, the first eighteen calendar days of an earnings month tend to be strong. From 1950 to 2008 the S&P 500 has been positive 71% of the time for the first eighteen calendar days and produced an average return of 1.4%. The strong performance is partly attributed to the investors pushing stock prices up ahead of earnings season. Alcoa kicks off the earnings season this week, but the bulk of the companies do not report until later on this month.

Investors like to get into the market ahead of the earnings release to take advantage of any possible positive earnings surprises. Currently, analysts are expecting earnings to fall 37% compared to last year (Thomson Rueters). This is the figure that is built into today’s prices. Given the relatively positive sentiment in the market recently, even if earnings come in as expected the market will react positively. Despite some of the poor data that has been released recently, such as, unemployment (a lagging indicator) at 8.5%, it is not all bleak: on Friday the government reported that factory orders rose 1.8% for the month of March.

On a longer term basis the market is at a key level.  On October 27th it was stated from a source that the market represented a buying opportunity. On that day the S&P 500 closed 849. The market rallied quickly to just over 1,000 before resuming its decline. Today the market sits at 843 and is essentially flat from my call in October.

In December it was stated from a source: “If we look at a shorter term graph of the S&P 500 we can see that there is support at 850 and resistance at 1,000. Both of these values have multiple touch points. If the market reaches 1,000 as I suspect it will over the next few months a lot will be revealed in the 1,000 battle. If the market is able to punch through on strong volume and sustain a rally, then this will be positive for the market longer term. If the market gets rebuffed at 1,000 then we will be stuck in the 850 to 1,000 trading range, waiting for a break above resistance or below support. There is still money to be made using seasonal trades in this area.”

Although the market broke down through the 850, both the 850 and 1000 levels are still key and need to be watched. We currently sit just under the 850 level. If we are able to crack through the 850 then this level should provide support. A run to 1,000 in the next month is probably overly optimistic. If the Bull Run continues for the next few months, the 1,000 level is going to provide major resistance and the market will probably get rebuffed at this point. More probable is a run to 925, which is still a healthy return. If the market does go through 850 with strong volume April should be a good month, barring any bad news surprises.

Last month the October 2002 low being key was being talked about. Although key support was broken I place a lot of credence on seasonally strong periods of sectors and the market, and typically use technical analysis to fine-tune the entry and exit dates. When there is still a significant amount of time left in the favorable six months of the market and a strong month approaching, I tend to defer to seasonal trends for the fear of being whipsawed, I typically need strong confirmation from several signals to consider exiting or reducing a position.

Next month in May. 2009, I will discuss playing the end of the Six Favorable Month strategy and timing a more defensive stance in the market.  At this time I am maintaining a stay in the market strategy to take advantage of the typical positive monthly results for April.