Check Out These Sectors For Q2 Upside

by: Todd Campbell

A new quarter means new opportunities. But, updating watch lists can be difficult given the thousands of publicly traded securities. To help narrow my focus, I always check seasonal tendencies because they remind me of repeating business and market cycles.

For Q2, 8 baskets offer solid seasonality.

Utilities post the strongest historical tailwinds this quarter, finishing higher in eight of the past 10 years and producing a median gain of 6.33%.

Typically, utilities tend to improve into summer as investors shift defensive and focus more on dividends and stable revenue streams.

Importantly, summer is the peak season for electricity thanks to cooling demand. As a result, investors often use the shoulder period of March through May to build up positions ahead of summer's hot weather.

The remaining seven strong seasonal performers have posted gains in seven of the past 10 years.

However, the Energy Select Spider ETF (NYSEARCA:XLE) -- ExxonMobil (NYSE:XOM) and Chevron (NYSE:CVX) are its biggest positions -- and natural gas (^XNG) offer a more spotty recent track record, with each losing ground during the past three Q2s.

Investors should keep in mind energy's longer-term seasonal trend was supported by mid decade emerging markets demand, which caused crude oil price spikes and robust exploration and development.

In the wake of this build out, production growth weighed down natural gas prices and in turn reduced overall North American drilling activity. The lower natural gas prices and falling natural gas rig counts contributed to energy's weak seasonal performance over the past few years.

However, the shift away from natural gas drilling has helped demand catch up with production recently. This has allowed natural gas prices to move up off their lows. If prices continue to improve, seasonality may re-exert itself this quarter.

Q2 is typically a solid quarter for healthcare too.

Of the healthcare baskets with strong Q2 seasonality, biotech is the most volatile. The iShares NASDAQ Biotech ETF (NASDAQ:IBB) -- which owns Regeneron (NASDAQ:REGN) and Gilead (NASDAQ:GILD) as its biggest positions -- has a standard deviation of 12.56% over the past 10 years.

Instead, the more diversified iShares DJ U.S. Healthcare ETF (NYSEARCA:IYH) and Healthcare Select Sector Spider (NYSEARCA:XLV) offer a lower standard deviation and solid average and median returns over the past decade.

For example, the XLV -- which owns Johnson & Johnson (NYSE:JNJ) and Pfizer (NYSE:PFE) as its biggest positions -- has a standard deviation of 6.84% and a median return of 3.30% in the quarter.

Another strong quarterly performer is the defensive consumer goods sector.

The Consumer Staples Select Spider ETF (NYSEARCA:XLP) owns Procter & Gamble (NYSE:PG), Philip Morris (NYSE:PM) and Coca-Cola (NYSE:KO) as its biggest positions. Those stocks offer predictable sales and profit growth with a dash of dividend protection. Over the past 10 years, the XLP has gained a median 2.44% with a 5.39% standard deviation.

Outside of biotech, only one other growth basket offers historically strong Q2 tailwinds.

The S&P Software ETF (BATS:IGV), which counts Oracle (NYSE:ORCL), Microsoft (NASDAQ:MSFT) and Salesforce (NYSE:CRM) as its biggest positions, has also finished higher in seven of the past 10 years.

However, the risk return for the IGV isn't very compelling. Over the past decade, the ETF has produced a median 1.46% with a 11.51% standard deviation. This suggests investors should approach the basket with caution.

Source: Seasonal Investor

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.