This sector trade is part of the pair trade with the consumer sector, rotating back and forth from one sector to another every six months. The favourable season tends to favour higher beta and therefore rewards discretionary over staples. We have just entered the time of the year when this strategy shifts from the staples sector to the discretionary sector. Investors should consider switching their consumer staples ETF for a discretionary ETF.

The period of seasonal strength for this sector is from January 29th to May 6th. The sector also does well from November to the beginning of May. One of the questions that I get asked a lot is, “does the U.S. seasonal period for the materials sector apply to the Canadian sector?” The Canadian sector has a different composition and as a result its entry date is earlier. The U.S. materials sector has a large percentage of its holdings in chemical stocks: the Canadian materials sector has a large percentage of its holdings in gold stocks and fertilizer stocks. As a result the sector’s seasonal trade is more akin to the Metal and Mining sector as compared with the U.S. sector. This trade is setting up for a good entry mid-November.

In the pasts posts, I recommended that investors should consider selling gold for the month of October and reentering the position at the beginning of November. The seasonal trade from July to September had produced a good profit and October is typically the worst month of the year for gold. As the U.S. dollar weakened in October gold remained firmly above the $1,000 mark. The fact that gold did not decline in the month that it typically has negative performance does not take away from a positive seasonal trend from the end of October to December. Gold typically performs poorly from the beginning of January into the early summer and is not a good seasonal trade. Remember to consider exiting the position in December.

Currently gold is trading at $1,096 with $1,000 acting as support. There is a possibility that the support line will be tested, but the expectation is that it will hold over the next few months and gold will be higher by the end of the year.

The American consumer never seems to give up. Responsible for approximately two-thirds of the country’s GDP, they keep spending money. Although the retail sector’s strongest seasonal period is from January 21st to April 12th, the seasonal trade from October 28th to November 29th is still favourable. This one month trade ends just after the start of the U.S. holiday season on Black Friday. Once again, the seasonal trade ends when the event that is driving the outperformance, starts. In other words, seasonal investors take advantage of other investors who enter the sector before American Thanksgiving trying to benefit from expected positive retail sales during the holiday period.

By the way, Happy Remembrance Day!

Last month, I stated that the technology sector was an attractive October purchase, either in the second week or last week of October and given current market conditions I would favour the last week of October. The second week of October proved to be at least a shortterm bottom as the sector is currently higher. Two of the bellwethers in this sector, Microsoft and Apple, came out with results that “pleased” investors and moved the sector higher. In the pasts posts I had made, I also stated that investors should watch the relative performance of technology stocks compared with the broad market. Strong performance would indicate positive strength in the market. Even though the technology sector has been outperforming, there is still a long way to go in this seasonal trade. As I mentioned, the technology sector usually does well until January 17th, but investors should consider reducing positions at the start of the Consumer Electronics Show in Las Vegas (January 7th to January 10th). This is the world’s largest electronics trade show and investors often take positions in the sector shortly before the trade show in order to catch a positive movement that is a result of any major technology product announcements. In essence, seasonal investors take advantage of this phenomenon by entering the sector before the other investors and exit after the sector has been pushed up and is over-crowded.

The sector as represented by the ETF (XLK) is currently just below resistance @$22. It is possible that the sector will have some short-term trials at this level, but once it gets through, look for a movement to $24 or $25.

Sector investing is always important and over the next six months it is expected that once again it will pay-off to overweight sectors of the market when they tend to outperform on a seasonal basis. In the past, even in markets that have bounced around, or frothy markets, a seasonal sector investment strategy has outperformed a buy and hold strategy.

When I last posted, I presented some up and coming sector strategies that represented attractive buying opportunities in October. In the next few days I will list the seasonally attractive sectors that are ripe for investment as they are currently starting their seasonally strong period.

This year, towards the end of October, the stock market (S&P 500) had risen 60% of the March lows and the technical signals were showing signs of a possible correction.

S&P 500 – Last 3 Years

Although October 28th has over the long-term been a good entry point into the market, it is an average date. Some years the best entry point is earlier and other years later. On a seasonal basis getting into the markets on October 28th has proven to be a prudent strategy to capitalize on the average trend and it still is today.

My position in my email last week was that although October 28th is still a good entry date, there may be value in delaying an entry into the market. As November, December and January have on average been the best three contiguous months of the year, investors should make sure that they do not sit on the sidelines too long. A good seasonal strategy is to start entering the market as of November 2nd and fi nish allocating funds to the market by November 13th.

The mid-November date is consistent with the end of the bottoming process that tends to occur during the first year of the Presidential Cycle. This is Obama’s first year in power and coincidentally the stock market’s performance is very similar in trend, but not magnitude, compared with the average of all first years of the Presidential since 1901. Like the average, this year’s performance had the market bottom in early March and peak in September.

This year, in the unfavourable season the S&P 500 has gained 15%. This compares to last year when the market (S&P 500) lost 40% from May 6th to October 27th. On average the unfavourable season from the beginning of May (May 5) to the end of October (October 27) has produced a loss of 1.1% from 1950 to 2008, versus the other six months which has produced an average gain of 7.6% (S&P 500). An average negative loss does not necessarily mean that every year from the beginning of May to the end of October was negative. The best way to think of this period is that it is more random than the other six months and it has been a poor period to hold the broad market. Despite this, there were some periods from the beginning of May to the end of October that have produced some large gains. What does it mean when the market advances in the unfavourable season? Historically, when the market has had a gain above 10% in the unfavourable period this has portended to a strong period in the following six months from the end of October to the beginning of May.

In the table comparing the returns for the favourable season versus the unfavourable season, the highlighted cells in the unfavourable season are periods of returns greater than 10%. In the last sixtynine years the unfavourable season has produced returns greater than 10% only seven times, compared with the favourable season’s twenty-five times. The story here is not how much better the favourable season is compared to unfavourable season, but the strong returns that tend to happen after a strong performance in the unfavourable season. All of the returns in the subsequent favourable period have been positive and they have produced an average 8.8% gain.

Does this mean that the returns in the next six months will necessarily be positive; no, but do not be surprised to see the market perform well. Essentially, a strong performance in the unfavourable season reflects strong positive investor sentiment. Although investors are “checking” their reality at this time, if the past pattern of positive results in the favourable season hold true, it will not be long until investors help propel the market up over the coming months.