Keep Seasonal Tendencies In Mind For An ETF Strategy Through February

by: Todd Campbell

The S&P 500 index appears at a crossroads as it enters resistance at its 200 day moving average. Just two weeks ago, investors abandoned markets amid fear of falling European GDP. Will the markets shrug off European bank liquidity risk and go higher? Or will the market roll over once again? Either way, history suggests investors should pay particular attention to sector allocation.

Knowing which parts of the market perform best during the coming months can help investors protect profits, which is why E.B. Capital Markets, LLC runs the numbers on widely traded sector and industry ETF's every month. After all, history doesn't always repeat, but it often rhymes.

So, which sectors and industries are likely to trade higher through February 28th? The best performing are overwhelmingly tied to basic materials. In fact, the basic materials ETF (NYSEARCA:IYM) has traded higher in eight of the past 10 years producing an average annual return of 2.29%. Diving a bit deeper, we find the Energy Service ETF (NYSEARCA:OIH) and the energy ETF (NYSEARCA:XLE) have both been up in seven of the past 10 years, returning 7.38% and 5.52% respectively. As an aside for futures investors, the AMEX natural gas index has also gone higher in seven of the past 10, producing an average annual return of 5.65%.

Clearly, energy stocks tend to do well as winter weather boosts consumption. But, what other asset classes look good? Corporate bonds might be a good place to stash some cash. The corporate bond ETF (NYSEARCA:LQD) has been up in eight of the nine years it's traded, returning 2.34% on average.

The Best & Worst ETFs for the 3 Months ending February 28th
Symbol Average Return
OIH 7.38%
LQD 2.34%
IYM 2.29%
IBB -1.67%
QQQ -3.36%
XLK -4.16%

Industrial goods (BATS:IYJ), retail (NYSEARCA:RTH), healthcare (NYSEARCA:XLV) and REITs (NYSEARCA:RWR) also post solid seasonality. Historically, the worst places to keep money through February have included biotech (NASDAQ:IBB), which typically does much better in the weak summer months, and technology (NYSEARCA:XLK), which investors often sell down early in the New Year. Both biotech and technology have posted gains in only four of the past 10 years. Not surprisingly, the NASDAQ 100 ETF (NASDAQ:QQQ) has been a poor performer. Over the past decade it's traded higher three times, falling 3.36% on average.

As investors compile watch lists and consider where they're most exposed to risk, it makes sense to keep seasonal tendencies in mind. If history is our guide, investors should focus more on energy and less on technology.

Disclosure: I am long QID.