There is an old adage on Wall Street that you have probably heard enough about at this point in the month, which is “Sell in May and Go Away”. However, as tempting as this simple solution sounds, it’s not always the right answer. The saying comes from data that shows that historically, returns have been much lower during the “seasonally weak” six-month period, which begins May 1st and lasts through the end of October. Consequently, November 1st through the end of April has become known as the “seasonally strong” period in the market. Since 1950, the Dow Jones Industrial (DJIA) has had an average annualized return of 7.20%, with the bulk of this return coming during the seasonally strong period. The average annualized return in the DJIA during the seasonally strong period has been 7.03% versus an average annualized return of just 0.15% during the seasonally weak period.
If you are still reading, my guess is that you have made the decision not to sell in May. While the bias is strong and convincing, on the other hand, there is historical precedent for the market to produce good returns during the seasonally weak period. Just last year, the DJIA posted a positive return of 11.64% from April 30th through October 31st and during six of the last ten seasonally weak periods, the market has finished in positive territory.
So, what does this all mean? Listen to the markets. Volatility has picked up in the market over the past few months; however, US Equities remains the number one ranked asset class in DALI. Specifically, Growth, from an investment style perspective, and Technology, from a sector perspective continue to lead their respective groups. So, we would continue to view these areas as the current leaders in the market. However, the Energy sector has recently been the biggest mover to the upside and is an area that warrants your attention today.
Most of the headlines you will read are about Crude Oil (CL/) hitting $70 a barrel for the first time since 2014. What you will not hear is that the Point & Figure chart of Crude Oil moved back into a positive trend in July 2017 at $50 and has remained positive ever since. The improvement in Energy has not been confined to this commodity, it has spilled over to the equity markets, driving improvement in oil-related stocks as well.
For the first time in over a year, the broad Energy sector has moved into the top half of the DALI Sector Rankings and is by far the most improved sector this year. Over the course of this year, the Energy sector has added 65 tally buy signals. The second most improved sector has been Consumer Cyclicals (+17 buy signals) while Utilities, Real Estate, and Consumer Staples have been the biggest movers to the downside.
One way gain exposure to the broad Energy sector is through the PowerShares DWA Energy Momentum Portfolio (PXI). PXI is currently the highest scoring broad based Energy ETF based on the DWA Technical Fund Score with a current score of 4.85 (a/o 5/7/18), and PXI is up 10.23% YTD, compared to a 2.14% gain for the S&P 500 Energy Sector (.SPSE) thru 5/7/18. All told, the weight of the evidence for the Energy sector has tilted to positive over the course of the past month, so this is a sector that we would consider taking positions in today and ideally on any near term pullback.
*All returns data is based upon the Dow Jones Industrial Average (DJIA) from April 30th, 1950 through October 31st, 2017. The "Seasonally Strong" returns are based upon investment during the months of November through April (of the following year). The "Seasonally Weak" are based upon investment during the months of May through October.
Dorsey Wright receives index licensing fees based on assets invested in the PowerShares Dorsey Wright Energy Portfolio (PXI)
Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss.
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Neither the information within this email, nor any opinion expressed, shall constitute an offer to sell or a solicitation or an offer to buy any securities, commodities or exchange traded products. This article does not purport to be complete description of the securities or commodities, markets or developments to which reference is made.
The relative strength strategy is NOT a guarantee. There may be times where all investments and strategies are unfavorable and depreciate in value. Relative Strength is a measure of price momentum based on historical price activity. Relative Strength is not predictive and there is no assurance that forecasts based on relative strength can be relied upon.
Unless otherwise stated, the returns do not include dividends or all transaction costs. Investors cannot invest directly in an index. Indexes have no fees. Past performance, hypothetical or actual, does not guarantee future results. In all securities trading there is a potential for loss as well as profit. It should not be assumed that recommendations made in the future will be profitable or will equal the performance as shown. Investors should have long-term financial objectives.