Which S&P Sectors Perform Best In 'Sell In May' Strategies?

by: Martin Vlcek

Over the weekend, I wrote an article about a very simple strategy, which takes advantage of the "Sell in May," effect and requires just two trades per year. We've had a very good discussion going on below that article with many smart inputs by Seeking Alpha fans. One of the topics raised was that it would be interesting to see how this strategy worked for various sectors of the S&P.

I did the calculation going ten years back. The results are really impressive. However, before you scroll to see the results, please allow me to make a quick note:

Keep it simple

My advice for all but the most risk-taking investors is to play it safe and perform the "Sell in May" strategy in its basic form. That means just switching between the S&P 500 index and the 20+ Year U.S. Treasuries. If you hold individual stocks instead of the index, then you can sell part of them and switch the money to Treasuries for the April 30 to October 31 period. Or you can try the below analyzed sector version of the strategy with just a small part of your portfolio to see how it suits you.

On a personal note, I am not a big aficionado of market-timing strategies. I prefer thorough analysis and a very long investing horizon. Focusing more on performing excellent sector research and individual stock picking within this sector will produce substantially higher overall positive effect on the performance of your portfolio. However, once you pick the right sectors and stocks, the "Sell in May" phenomenon can help you generate nice additional income. The "Sell in May" strategy is so simple and backed up by such a high quality academic research, that I simply can't resist and have to dig in deeper into this seasonal anomaly.

Sector versus broad index

Generally, the S&P sector performance is much more dependent on individual influences, which are specific for that sector. The broad S&P 500 index is more stable and predictable. Moreover, sector valuation and fluctuation is highly influenced by individual stocks and their specific factors. These can change rapidly and randomly in a particular sector. So let's have a look how individual sectors coped with the "Sell in May" effect of generating different returns in the winter and summer periods. For clarification, the summer, for our purposes, means the period of April 30 to October 31. The winter represents the remaining half of the year, which is the October 31 to April 30 period. All calculations include dividends and trading fees.

"Sell in May" effect:

  1. Materials (NYSEARCA:XLB) with 9.66%
  2. Energy (NYSEARCA:XLE) with 9.42%
  3. Industrials (NYSEARCA:XLI) with 9.40%
  4. Consumer discretionary (NYSEARCA:XLY) with 6.29%
  5. Health care (NYSEARCA:XLV) with 5.73%
  6. S&P 500 index with 5.04%
  7. Financials (NYSEARCA:XLF) with 4.48%
  8. Telecommunications (NYSEARCA:VOX) with 2.37%
  9. Consumer Staples (NYSEARCA:XLP) with 2.26%
  10. Utilities (NYSEARCA:XLU) with 0.65%
  11. Technology (NYSEARCA:XLK) with -0.20%
  12. Treasuries with -4.74%

Materials, Energy and Industrials are the sectors, with the highest difference between the winter and summer performance. Technology and Treasuries actually have a negative "Sell in May" effect, meaning their performance is better over the summer than during the winter.

Let's have a look at the breakdown of these numbers into winter and summer performance.

Winter performance (returns just for the winter periods)

  1. Energy 12.30%
  2. Materials 9.25%
  3. Industrials 9.14%
  4. Consumer discretionary 7.96%
  5. Health care 6.54%
  6. S&P 500 index 6.24%
  7. Consumer Staples 5.91%
  8. Utilities 4.84%
  9. Telecommunications 4.54%
  10. Technology 4.20%
  11. Financials 2.03%
  12. Treasuries -0.78%

Summer performance (returns just for the summer periods)

  1. Technology 4.40%
  2. Utilities 4.19%
  3. Treasuries 3.95%
  4. Consumer Staples 3.65%
  5. Energy 2.88%
  6. Telecommunications 2.17%
  7. Consumer discretionary 1.67%
  8. S&P 500 index 1.20%
  9. Health care 0.81%
  10. Industrials -0.26%
  11. Materials -0.41%
  12. Financials -2.46%

Evaluation of various "Sell in May" strategies for S&P sectors

1. Buy-and-hold strategy (full annual return)

  1. Energy 15.4%
  2. Consumer Staples 9.69%
  3. Consumer discretionary 9.68%
  4. Utilities 9.15%
  5. Industrials 8.77%
  6. Materials 8.73%
  7. Technology 8.70%
  8. S&P 500 index 7.45%
  9. Health care 7.34%
  10. Telecommunication 6.75%
  11. Treasuries 3.14%
  12. Financials -0.46%

For the buy-and-forget strategy, the Energy, Consumer Staples and Consumer discretionary were the top three best performing sectors in the past ten years.

Strategy of switching to Treasuries for the summer (full annual return)

  1. Energy 16.70%
  2. Materials 13.53%
  3. Industrials 13.42%
  4. Consumer discretionary 12.19%
  5. Health care 10.72%
  6. S&P 500 index 10.40%
  7. Consumer Staples 10.06%
  8. Utilities 8.94%
  9. Telecommunication 8.63%
  10. Technology 8.28%
  11. Financials 6.02%
  12. Treasuries 3.14%

For the strategy of selling in May to hold Treasuries over the summer season, the Energy sector wins again, followed by Materials and Industrials.

The absolute returns are substantially higher for virtually all sectors. The positive effect of switching to Treasuries is least visible for the top performer and most impacting for the laggards. Technology and Utilities were the only two sectors which were hurt by switching to Treasuries in the summer. This can be easily explained by the fact that these two sectors perform better during the summer season than Treasuries.

The implication of this summer outperformance is that Technology and Utilities sectors are an even better summer hedge than Treasuries, with Technology being the best by a small margin. Therefore, Technology will be used as the best performing summer sector, to which we will be switching in the most advanced "Sell in May" strategy evaluated just below.

Strategy of switching to the best performing summer sector

  1. Energy 17.08%
  2. Materials 13.93%
  3. Industrials 13.81%
  4. Consumer discretionary 12.59%
  5. Health care 11.13%
  6. S&P 500 index 10.81%
  7. Consumer staples 10.48%
  8. Utilities 9.36%
  9. Telecommunication 9.05%
  10. Technology 8.70%
  11. Financials 6.46%
  12. Treasuries 3.14%

The best performer from all the S&P 500 sectors in the past ten-year period for this ultimate strategy is the Energy sector, with a total return of a hefty 17.08%. The trade benefited from the switch to Treasuries by a mere 1.3% annually because if we simply held the XLY permanently for the past ten years, the annual appreciation would have been a very impressive 15.4% p.a.

The average improvement resulting from the most advanced sector strategy over the buy-and-hold was 2.93% p.a. Financials reaped the highest benefit, improving the return by 6.92% from a loss of -0.46% to an acceptable positive 6.46%.

The improvement from the moving to the best summer sector strategy over the moving to Treasuries strategy was 0.41% on average. This number is the same or very similar for every sector as this is approximately the difference between the summer performance of the best performing Technology sector over Treasuries.

The highest improvement over the buy-and-hold strategy was again achieved in the case of the Financials sector, where it yielded a 6.49% improvement p.a.


For more curious investors, I am attaching my tables with the most important calculations.

10-year calculations:

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5-year calculations:

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The sector switching "Sell in May" strategy clearly beats the buy-and-hold by a large margin. On average by a significant 2.93% p.a. The simpler strategy of switching just to Treasuries yields a bit lower outperformance of 2.52%. However, it is simpler and has more stable and predictable results throughout the historical time periods. Also, it is more realistic for successful long-term trading. The sector switching strategy is more unpredictable because it generates different best and worst performers for various time periods and time lengths in the past and is likely to behave in a similar unpredictable way in the future. Not only was the best performer for the ten-year period different than for the period of the last five years, but the top performer didn't even maintain its best performance in the last five years. Moreover, in the last 5-year period, the strategy of moving into Treasuries outperformed the strategy of moving into the best performing S&P sector. In the long term, it is very challenging to predict which sector will be outperforming or underperforming the broad market or other sectors.

Moreover, the testing period of the last ten years is quite short. Even if the testing were performed on a 100-year series, there can never be a guarantee that this or any other strategy will work in the future as well as it performed in the past.


Although the strategy of switching to the best performing summer sector during the April 30 to October 31 timeframe generates positive results over the buy-and-hold and is relatively easy to pull off, I recommend trading the "Sell in May" effect in its simple form of switching part of the stocks you might be holding over the winter to Treasuries over the summer. This strategy still beats the broad S&P 500 market handsomely with higher predictability and lower beta than the buy-and-hold strategy. If you plan to use the more advanced sector switching strategy, be prepared to exercise the strategy over at least ten years to yield positive results. Also, allocate just a reasonably safe portion of your portfolio to it.

Will the Energy sector keep up its stellar performance in the future? Which market-timing tricks do you use, if any?

Disclosure: I am short SPY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.