The domestic equity markets continue to be strong. When markets tend to move in one direction, either up or down, it can often make historical data worthless. Nonetheless, just as I do every month I like to look back at historical sector performance for the upcoming month.
Year-to-date historical upward trends have held true to form. Health care stocks had a good January, and natural resources had a good February. Month-to-date we see the strong trend continuing with consumer discretionary stocks as I wrote about last month. However, we are continuing to see strong performance in the technology sector this month. This bucks the historical trend over the last twenty-five months of March. Many believe this is due to window dressing that is occurring with fund managers as they try to play catch up to the names they have missed out on over the last few years. For example, take a look at the top 10 holdings of some of the largest large cap growth mutual funds. Apple (OTC:APPL) rarely shows up on any of the lists. This obviously shows that these managers did not even own a minor position in Apple years ago, because if they had it would have grown to be one of the top holdings. Apple's market cap has grown to such a high level that even with window dressing these fund managers cannot afford to build a big enough stake to have it show up in their top 10 holdings. They simply missed the boat.
For the month of March, as of the close on March 26th, the S&P 500 is up 3.84%. The Consumer Discretionary Select Spider ETF (NYSEARCA:XLY) and the Spider S&P Retail ETF (NYSEARCA:XRT), are both continuing their strong historical March trend being up 5.25% and 6.96% respectively. The average technology index is up 5.20% month-to-date.
On to April, and a look at what the historical sector performance data is showing me over the last twenty-five years. Historically it has been a fairly good month for the overall market. The S&P 500 has gone up in nineteen of the last twenty-five Aprils. Please keep in mind that the "Go Away In May" mentality will be quickly upon us. Often I like to look at the compounded return for a particular month to really show what sectors would have provided you the most bang for your buck. The compounded average annual return for the S&P 500 over the last twenty-five Aprils (approximately 750 days) is 25.28%. This is very strong.
The most strength can be seen in the energy and natural resource sectors. The average annual compounded return for the average equity energy fund over the last twenty-five Aprils is 55.32%. The average annual compounded return for the average natural resources fund has been 40.58% over the last twenty-five Aprils.
The majority of the other sectors have performed in-line-with or slightly below the S&P 500 for the examined period of time. That is with the exception of the health care sector. The average annual compounded return for the average health care fund over the last twenty-five Aprils is only 6.46%. To show just how poorly health care funds have performed in the month of April look at April 2009. Everything in April of 2009 was skyrocketing off of the depressed lows reached in March of 2009. The average health care fund on the other hand only went up by .51% in April 2009. Granted the health care sector was not hit as hard as other sectors, but the prices were still extremely depressed and not even an appetite for equities was enough to buck their historically weak April trend.
Specific investment products to try and take advantage of the historical April sector trend would include two ETFs. The Energy Select Spider ETF (NYSEARCA:XLE) and the Spider S&P Global Natural Resources ETF (NYSEARCA:GNR) would both be excellent cost-effective choices if you wish to position yourself based upon the data that I have provided. The cyclical sector trends look particularly appetizing going into April. While XRT and XLY have outpaced the market in March, both XLE and GNR are down for the month. I would expect the window dressing in technology stocks to continue which will send previous winners to new highs. As always, I suggest locking in gains a little at a time. Things that go up will come back down at some point.
Thank you. Good luck everyone!
Additional disclosure: I intend to establish a long position in XLE on Friday March 30th.