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Nov. 13, 2009, 9:59 p.m. EST

Timing the cycle

Five U.S. market sectors to own for the next six months

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By Jonathan Burton, MarketWatch

SAN FRANCISCO (MarketWatch) -- Any investor who followed the old market adage to "Sell in May and go away" is probably feeling left behind, with the benchmark Standard & Poor's 500-stock index up 25% since the end of April.

No regrets; there may be more where that came from. The period from November through April historically has been the best six months of the year for U.S. stocks, and even better for the market's most cyclical sectors.

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Sector investors win in winter

November through April has historically been the best period for U.S. stocks, but that six-month period is even better for the market's most cyclical sectors, says Sam Stovall, chief investment strategist at Standard & Poor's Equity Research. MarketWatch's Jonathan Burton reports.

"Whether you look back to 1990, 1970, 1945 or 1929, the S&P 500's /zigman2/quotes/210599714/realtime SPX -4.04% performance from November through April substantially outperformed the market's typical price change from May through October," Sam Stovall, chief investment strategist at Standard & Poor's Equity Research, wrote in a recent report to clients.

Moreover, the S&P 500's cyclical, economically sensitive sectors have been the warmest places to invest through the winter. During this timeframe, the Industrials, Materials, Financials, Consumer Discretionary and Information Technology sectors traditionally recorded their strongest price gains and frequencies of beating the market.

Studies reinforce S&P's data. Two researchers at New Zealand's Massey University, Ben Jacobsen and Nuttawat Visaltanachoti, found that while all U.S. market sectors perform better in winter, the season is especially generous to stocks and sectors related to industrial production and raw materials than they are for companies tied to consumer consumption.

This timing tactic didn't work in 2008, of course, as stocks failed on almost every front. History, after all, is only a guide. Still, sector investors can use history to their advantage -- particularly since this calendar pattern, commonly known as the "Halloween Effect," is one persistent strategy that doesn't seem to get much credit. Said Stovall: "Who's going to arbitrage it away if nobody takes it seriously?"

Industrials

/zigman2/quotes/202026558/composite XLI 91.54, -3.54, -3.72%
/zigman2/quotes/210599714/realtime SPX 3,923.68, -165.17, -4.04%
XLI

Since 1990, the S&P 500 Industrials sector has posted an average gain of 7.9% in the November through April period, versus a 5.9% advance for the broad index.

Industrials have been relatively quiet so far this year. The average industrials-focused mutual fund had gained slightly more than 20%, lagging the S&P 500's 23% return, according to investment researcher Morningstar Inc. A representative exchange-traded fund, Industrial Select Sector SPDR /zigman2/quotes/202026558/composite XLI -3.72% , has gained around 19%, while another entry, iShares Dow Jones US Industrial /zigman2/quotes/207844152/composite IYJ -3.45% , is up 22%.

Industrials' lackluster performance encourages David Kudla, chief investment strategist at financial advisory firm Mainstay Capital Management. He's bullish on the sector's prospects, particularly for corporate giants with a global footprint.

"Those large multinational exporters are going to benefit from government stimulus around the world and from a falling U.S. dollar," Kudla said, noting that he's also optimistic about the Technology and Materials sectors.

"It's hard for me to get away from the basic stuff," added Hugh Johnson, chief investment officer at money manager Johnson Illington Advisors. His favorite Industrials stocks include Caterpillar Inc. /zigman2/quotes/203434128/composite CAT -2.42% and Deere Co. /zigman2/quotes/207941296/composite DE -4.06%

Two specialized Fidelity mutual funds have been sector standouts. Fidelity Select Industrials Fund /zigman2/quotes/200538242/realtime FCYIX -4.08% was up 33% through Nov. 13, while sibling Fidelity Select Industrial Equipment Fund gained 34%.

Materials

/zigman2/quotes/204467551/composite XLB 82.04, -2.63, -3.11%
/zigman2/quotes/210599714/realtime SPX 3,923.68, -165.17, -4.04%
XLB

The Materials sector has enjoyed an average 9.7% gain from November through April since 1990, according to S&P.

This year the commodity-heavy sector has been on a tear. Materials Select Sector SPDR /zigman2/quotes/204467551/composite XLB -3.11% , for example, is up 42%, including an 8.5% gain in the first 10 days of November alone. The ETFs largest holdings include Monsanto Co. /zigman2/quotes/225322099/composite MON -0.51% and Freeport-McMoRan Copper & Gold Inc. /zigman2/quotes/200215692/composite FCX -6.11%

/zigman2/quotes/210599714/realtime
US : S&P US
3,923.68
-165.17 -4.04%
Volume: 2.71B
May 18, 2022 4:56p
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/zigman2/quotes/202026558/composite
US : U.S.: NYSE Arca
$ 91.54
-3.54 -3.72%
Volume: 11.17M
May 18, 2022 4:00p
loading...
/zigman2/quotes/207844152/composite
US : U.S.: Cboe BZX
$ 92.57
-3.31 -3.45%
Volume: 157,197
May 18, 2022 4:10p
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/zigman2/quotes/203434128/composite
US : U.S.: NYSE
$ 207.94
-5.15 -2.42%
Volume: 4.72M
May 18, 2022 4:00p
P/E Ratio
17.44
Dividend Yield
2.14%
Market Cap
$113.66 billion
Rev. per Employee
$489,071
loading...
/zigman2/quotes/207941296/composite
US : U.S.: NYSE
$ 368.67
-15.59 -4.06%
Volume: 1.54M
May 18, 2022 4:00p
P/E Ratio
20.44
Dividend Yield
1.14%
Market Cap
$117.88 billion
Rev. per Employee
$588,029
loading...
/zigman2/quotes/200538242/realtime
US : U.S.: Nasdaq
$ 26.60
-1.13 -4.08%
Volume: 0.00
May 18, 2022
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/zigman2/quotes/204467551/composite
US : U.S.: NYSE Arca
$ 82.04
-2.63 -3.11%
Volume: 6.97M
May 18, 2022 4:00p
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/zigman2/quotes/225322099/composite
US : U.S.: Nasdaq
$ 9.79
-0.05 -0.51%
Volume: 2,213
May 18, 2022 3:59p
P/E Ratio
46.82
Dividend Yield
N/A
Market Cap
$307.50 million
Rev. per Employee
N/A
loading...
/zigman2/quotes/200215692/composite
US : U.S.: NYSE
$ 35.34
-2.30 -6.11%
Volume: 18.28M
May 18, 2022 4:03p
P/E Ratio
10.24
Dividend Yield
1.70%
Market Cap
$54.55 billion
Rev. per Employee
$974,777
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