Sector Seasonality: Does 'Sell In May And Go Away' Have A Sector Bias?

As of Friday, May 1, we have officially entered what is known as the "seasonally weak" six month period of the market. Over the next week, we will publish a handful of articles around “Market Seasonality” and strategies that can be used to leverage this historical bias.

The historical evidence (since 1950) regarding market returns is at least a little sobering for the May to November period, which we’ve just entered. There is no question that the November to May period has provided substantially better returns over time than the six months beginning with "May Day."

Whether you average it, annualize it, compound it, or complicate it further, there exists a wide performance spread between the average six-month returns of each holding period. We could hardly hope to explain this bias, much less the severity over time, but suffice it to say the "strong six-months" of the year have accounted for the entirety of the Dow's average annual compounded return since 1950. The average annualized return of the Dow during the seasonally strong six-months has been better than 7%, while the "other" six months have produced an annualized return of less than one percent based upon an initial investment in 1950.

Those of you who have been following our research for any length of time know that sector rotation is a key aspect of many of our strategies. So naturally, with the seasonal bias of the market in mind, we began to wonder how individual sectors might be affected by the seasonality phenomenon. While we don't have the same longevity in terms of data for sectors as we do for broad market indices, we have observed performance biases within the past 20+ years, which we illustrate below using the 40 DWA equal-weighted sector indices.

Let's first look back at the six months ending April 30, 2020, in which the Dow Jones Industrial Average (DJIA) posted a loss of -9.98%, underperforming its median return of 5.88% during the seasonally strong period as well as the median return of 2.14% for the seasonally weak period.  When we dig a little deeper into the sector level, we find that just nine sectors gained more than the Dow. The best sector was the internet group, as represented by the internal Dorsey Wright Internet Index, up 15.35%, meanwhile, oil, as represented by the Dorsey Wright Oil Index was the worst-performing sector, down a whopping -45.25%.

Please see the disclosures for important information regarding the returns above.

This graphic above utilizes our inventory of 40 DWA equal-weighted sector indices, which have been "live" for the duration of our study period (most have been published since 1998), as well as a handful of benchmarks tracking equity and bond markets. Combined with a second image below, the study includes market data from April 28, 2000, through April 30, 2020, tracking the returns of each index within the seasonal ranges defined by traditional studies (the weak period spans May 1 through October 31, while strong periods span November 1 through April 30 of the following year).

The results are illustrated through graphs sorted by the "median" return of each index during each seasonal side of the study period, as well as the "min" and "max" return periods.

The overriding observation is that the seasonal bias of market returns is not limited to cap-weighted indices such as the S&P 500 Index (SPX) or blue-chip indices such as the Dow Jones Industrial Average. All 40 DWA groups have positive median returns in the seasonally strong six months of the year during our study period, which now includes three significant bear markets.

As shown below, many sectors tend to experience losses during the seasonally weak six months of the year, with semiconductors, steel, and oil services producing the worst median returns over the study period. In contrast, the internet, software, and waste sectors have historically produced the best median returns of the 40 sectors during the seasonally weak period.

*Please see the disclosures for important information regarding the returns above.

Nasdaq Dorsey Wright offers investors a free trial of the NDW Research Platform, which provides turnkey research and analysis for securities selection, portfolio management and asset allocation. Click here for more information. For questions about the NDW strategies, contact us here.

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Dorsey, Wright & Associates, LLC, a Nasdaq Company, is a registered investment advisory firm. Registration does not imply any level of skill or training.

The Dorsey Wright Sector Indexes are non-investable, equal weighted baskets of stocks including the largest and most liquid names from within each sector.  The indexes are rebalanced daily and do not include the reinvestment of dividends.   Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss.   

Unless otherwise stated, the performance information included in this article does not include dividends or all potential transaction costs. Investors cannot invest directly in an index. Indexes have no fees. Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss.

Nothing contained within the article should be construed as an offer to sell or the solicitation of an offer to buy any security. This article does not attempt to examine all the facts and circumstances which may be relevant to any company, industry or security mentioned herein. We are not soliciting any action based on this article. It is for the general information of and does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Before acting on any analysis, advice or recommendation (express or implied), investors should consider whether the security or strategy in question is suitable for their particular circumstances and, if necessary, seek professional advice.

Dorsey Wright’s relative strength strategy is not a guarantee. There may be times when all assets 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 to be successful or outperform any index, asset, or strategy.

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Nasdaq Dorsey Wright is a registered investment advisory firm with more than 30 years of expertise is technical analysis, specifically focusing on the steadfast relationship between supply and demand in the markets. Our research and tools help our clients see through the day-to-day clutter of market movements while providing a clear understanding of where market strength lies at all times.

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