by Johnson Research Group | November 8, 2012 8:43 am
Stocks are off to a rocky start for November as the post-election trading immediately wiped more than 2% from the major indices. In addition to the selling frenzy Wednesday, the S&P 500 and other indices broke through psychologically significant trading levels.
The S&P 500, for example, broke through the 1,400 level that has served as support for the past few weeks. The Dow Jones Industrial Average shot through the 13,000 level — a similar support.
With stocks reeling, traders rightfully should be asking themselves: Is there anything positive to latch onto?
Many investors might not know that November and December are among the better-performing months of the year. The table below identifies month-by-month performance for the S&P 500 over the past 20 years. The average returns of +1.4% and +2% for November and December, respectively, put them both among the top 25% of monthly returns of the year.
Diving deeper into the numbers, November has been favorable for stocks given a 64% winning rate — which means 64% of the time, you can expect an average return of 4.4%, compared to losing 3.8% for 36% of the time. If Vegas offered those kinds of odds, it would have gone out of business long ago.
This year, a wrinkle might be forming in the seasonal trends as the presidential results provide a twist to the market. While the market does often act favorably to a Democratic president being in power, it’s also often the case that the first few months of a Democrat’s term (first or re-elected) results in negative performance for the S&P 500.
This year also is muddied by the immediate questions focused on the impending “fiscal cliff” that we will drive over on Jan. 1, 2013, unless Congress can come to an agreeable resolution.
Finally, the waters get even murkier thanks to a troubling technical formation that might have been triggered by Wednesday’s selloff. The pattern — a head and shoulders on the S&P 500 — has bearish implications, suggesting traders are shifting into sell mode after months of rallying against the grain.
The question persists: Are there any attractive investment options to be had right now?
First, following the seasonality angle, the best-performing ETF for the month of November (based on average monthly performance since 2000) is the Market Vectors Gold Miners ETF (NYSE:GDX), which holds companies like Barrick Gold (NYSE:ABX) and Goldcorp (NYSE:GG). On average, this ETF returns 7.3% in November. This also is a timely play given the fact that the market is readjusting to the loose printing approach of Ben Bernanke, who we assume will remain in place given the Obama win (though he still might step down in 2014).
Another attractive ETF for the month of November is the SPDR Homebuilders ETF (NYSE:XHB), which holds homebuilders like PulteGroup (NYSE:PHM), but also sector-related stocks like Whirlpool (NYSE:WHR) and Lowe’s (NYSE:LOW). While this ETF’s average November performance is in the negative since 2000, the current market environment should favor these companies. The fact the Fed will continue its plight to bolster the economy via purchases in the mortgage market play strongly to companies associated with the housing sector. The XHB should continue its strong run based on these factors.
Finally, believe it or not, energy pops up to the top of the list for November performers. The Energy Select Sector SPDR (NYSE:XLE) averages a return of just more than 2% for November. Companies like ExxonMobil (NYSE:XOM), Chevron (NYSE:CVX) and ConocoPhillips (NYSE:COP) have been able to hold their technical patterns intact, despite the market’s weakness. Given the commodity markets and continued demand, our outlook favors this group to maintain their leadership in November.
On a side note, the ample dividends offered by many of the XLE’s holdings will lure some investors into this group, too, helping to move the fund higher.
While November is off to a rocky start, by most indications, we should expect to see investors and traders move some sidelined cash back into equities before year’s end. As difficult as it is, the recent violent selling in stocks might be opening the door to the buying opportunity we have been awaiting for months.
As of this writing, the Johnson Research Group did not hold a position in any of the aforementioned securities.
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