Which Sectors Should Outperform for the Rest of the Year?

by Daniel Putnam | August 20, 2012 12:52 pm

Which Sectors Should Outperform for the Rest of the Year?

Nobody likes to see summer come to an end, but the autumn months aren’t without their merit. Football starts, the kids go back to school and volume returns to the stock market.

The beginning of September typically kicks off one the most volatile periods of the year for stocks, creating opportunities for traders and investors alike. But are there any sectors of the market more likely to outperform during the final four months of the year?

While seasonal trends aren’t the most reliable guide, a look at the past decade reveals some interesting results — and these may shed some light on the market action of the past month.

The table below uses exchange-traded funds to evaluate the performance of the broader market and its ten major sector components in the September-December period during the past decade:

ETF TICKER AVERAGE RETURN RELATIVE PERFORMANCE YEARS OUTPERFORMING
SPDR S&P 500 ETF (NYSEARCA:SPY[1]) SPY 3.53%
Select Sector Energy SPDR XLE 5.83% +2.30 6
Select Sector Technology SPDR XLK 5.70% +2.16 8
Select Sector Materials SPDR XLB 5.12% +1.59 8
Select Sector Industrials SPDR XLI 4.41% +0.88 7
Select Sector Consumer Discretionary SPDR XLY 3.80% +0.27 5
Select Sector Utilities SPDR XLU 3.29% -0.25 5
Select Sector Consumer Staples SPDR XLP 3.17% -0.36 3
iShares Telecommunications Sector Index Fund IYZ 2.96% -0.57 4
Select Sector Health Care SPDR XLV 2.74% -0.79 4
Select Sector Financials SPDR XLF -0.47% -4.01 3

The data shows some trends that might be of use to investors in the remainder of 2012, among them:

These results for the September-December period are interesting in light of the current valuation disparities in the market. Last week, CNBC’s Fast Money presented a table showing the massive disconnect between valuations in the defensive, high-yielding sectors versus those in the cyclical areas[2]:

SECTOR P/E VS. HISTORICAL AVG.
Utilities 18.3 27% Above
Consumer Staples 18.9 11% Above
Health Care 18.4 7% Above
Technology 16.6 20% Below
Energy 11.7 22% Below
Materials 17.6 25% Below

Put these two factors together — valuations and seasonality — and it illustrates the potential for outperformance by the cyclical sectors through the rest of 2012. Indeed, this sea change might already be underway, if the returns of the ten major sectors since July 31 are any indication:

ETF RETURN 7/27-8/17
SPY 2.52%
Technology 5.56%
Telecommunications 4.06%
Energy 3.35%
Industrials 3.25%
Materials 3.22%
Consumer Discretionary 2.60%
Financials 2.51%
Consumer Staples 0.81%
Health Care -0.90%
Utilities -2.63%

In the near-term, stocks face the potential headwinds of a low VIX[3] and the flood of media hand-wringing that will occur if a slight downdraft causes the major indices to look as though they are forming a double-top. If a correction does in fact occur, this data may provide a clue as to which sectors provide the best opportunity for buying the dip.

Endnotes:
  1. SPY: http://studio-5.financialcontent.com/investplace/quote?Symbol=SPY
  2. cyclical areas: http://investorplace.com/2012/07/9-insanely-cheap-dividend-stocks/
  3. low VIX: http://investorplace.com/2012/08/with-vix-this-low-what-you-need-to-know/

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