Forecasting Into 2019 With Top 4-Year Sector ETF Seasonality Patterns

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Includes: LABU, SPY, UBIO, XLB, XLE, XLF, XLI, XLK, XLP, XLU, XLV, XLY
by: JD Henning
Summary

Survey of the top ETFs across 9 sectors, S&P 500, and biotech industry over the past 4 years.

Use this article as a 2019 reference for sector anomalies that may enhance investment success based on possible macroeconomic cycles.

This list of charts may serve as a useful reference on the monthly success rates of all the major sectors over the past 6 years and includes average monthly gains inside each bar chart.

The last set of charts shows the % of months in which each of the sectors outperformed the S&P 500 as represented by the SPY ETF.

A matrix of the best/worst performing sectors by month is provided as a guide to enhancing returns in the coming year.

Patterns often repeat and stocks at the aggregate level can have significant cyclical performance behaviors. This informal survey of the top ETFs across all the major sectors may give you some additional insight into any recurring patterns for your investment advantage into 2019.

This article is a continuation of the 2018 sector analysis articles:

August Market Outlook: What Do 5 Years Of Prior Sector Cycles Show?

Is The Technology Sector Headed For Another Q2 Breakout?

The Big Picture

An aggregate plot of 63 years of average month-to-month percentage changes in the S&P 500 may reveal further advantages across nine different underlying sectors that produce these returns for the index. While it is good to know which months tend to produce better results for the S&P 500, it is also very beneficial to know which sectors are contributing to best results in recent years.

This post is designed as a reference article for your portfolio trading into 2019. The analysis consists almost entirely of monthly chart performance patterns and comparisons by sector over the past four years. The article concludes with a probability matrix to navigate the collection of ETFs for the best expected annual returns based on prior performance. You may also find it helpful to enhance stock selections within sectors that are expected to outperform based on cyclical patterns, and avoid stocks in certain sectors likely to underperform.

SPDR S&P 500 ETF (SPY) - Largest of all ETFs available.

4-Year Seasonality Chart of SPY with arrows indicating the monthly changes in the 5-year average from 2018. April through September showing improving conditions for the SPY. Last year's October sell-off contributed to a major drop in the SPY average for the fourth quarter.

Sector Performance Past 4 Years compared to S&P 500

Benchmark S&P 500 (SPX) +35.22%

  1. Consumer Discretionary Sel Sect SPDR ETF (XLY) +63.07%
  2. Technology Select Sector SPDR ETF (XLK) +80.91%
  3. Industrial Select Sector SPDR ETF (XLI) +45.41%
  4. Materials Select Sector SPDR ETF (XLB) +21.41%
  5. Energy Select Sector SPDR ETF (XLE) -5.78%
  6. Consumer Staples Select Sector SPDR ETF (XLP) +24.82%
  7. Health Care Select Sector SPDR ETF (XLV) +40.45%
  8. Utilities Select Sector SPDR ETF (XLU) +36.17%
  9. Financial Select Sector SPDR ETF (XLF) +43.00%

Individual Sector Performance Charts From Jan 2015 To Jan 2019

Healthcare - Health Care Select Sector SPDR ETF (XLV)

4-Year Seasonality Chart of XLV with arrows indicating the monthly changes in the 5-year average from 2018. 5 out of 12 months have gotten worse due to returns from last year.

Healthcare/Biotech Sub-Sector Comparison

Often when discussing the healthcare sector the comparison arises between the ProShares UltraPro Nasdaq Biotechnology (UBIO) and the Direxion Daily S&P Biotech Bull 3X ETF (LABU). The chart above compares the performance between the two leveraged bull funds by monthly average over the past four years, showing which fund has outperformed more each month of the year on average. It appears that LABU tends to outperform UBIO in the first half of each of the past 5 years and UBIO tends to outperform LABU in the second half of the average year. Values of 50% represent a virtual tie between the two biotech funds. LABU has outperformed UBIO in April for each of the past 4 years.

Technology Select Sector SPDR ETF (XLK)

4-Year Seasonality Chart of XLK with arrows indicating the monthly changes in the 4-year average from 2018. June has become even worse as the lowest performing month for the technology sector, while May and July consistently outperform on each side of the worst month. 8 out of 12 months have gotten worse due to last year. Avoid the tech sector in June if this pattern continues to deliver into 2019. The months in the fourth quarter became significantly worse after 2018 that saw the worst performance in technology in many years.

Consumer Staples Select Sector SPDR ETF (XLP)

4-Year Seasonality Chart of XLP with arrows indicating the monthly changes in the 5-year average from 2018. January and February still remain the 2 best months of the year on average. 5 out of 12 months see improvements in sector prices more than 75% of the time on average. However 8 out of 12 months have gotten worse due to last year's performance.

Energy Select Sector SPDR ETF (XLE)

4-Year Seasonality Chart of XLE with arrows indicating the monthly changes in the 5-year average from 2018. April and September remain the best months for potential gains in the energy sector, but performance from last year has lowered the odds in 7 of 12 months.

Financial Select Sector SPDR ETF (XLF)

4-Year Seasonality Chart of XLF with arrows indicating the monthly changes in the 5-year average from 2018. The odds of monthly gains declined in 8 of 12 months from last year. July and November have been consistently outperforming months in every year since 2015 for the financial sector.

Consumer Discretionary Select Sector SPDR ETF (XLY)

4-Year Seasonality Chart of XLY with arrows indicating the monthly changes in the 5-year average from 2018. The Consumer Discretionary sector showed significant improvement in the first 3/4 of the year, but suffered more in the fourth quarter. The best months for expected gains in the sector are May and July.

Industrial Select Sector SPDR ETF (XLI)

4-Year Seasonality Chart of XLI with arrows indicating the monthly changes in the 5-year average from 2018. The best months for expected gains in the industrial sector are July and November. 6 out of 12 months have better than 75% record of return gains for the month.

Remarkably, 11 out of 12 months have 50% or better odds of returning gains as high as 4.5%. The industrial sector has been showing considerable strength over the past 4 years.

Materials Select Sector SPDR ETF (XLB)

4-Year Seasonality Chart of XLB with arrows indicating the monthly changes in the 5-year average from 2018. The best months continue to be April and November for gains in the material sector. 7 out of 12 months saw further declines in the probability of gains for the materials sector, with August and September showing only 25% of gains in those months.

Utilities Select Sector SPDR ETF (XLU)

4 Year Seasonality Chart of XLU with arrows indicating the monthly changes in the 5-year average from 2018. The utilities sector with particularly low volatility showed 7 out of 12 months with gains at 50% probability. Only October consistently delivered gains in each of the prior years from 2015.

As the chart shows, the utility sector delivers steady gains with almost equal chances of gain/loss in a majority of the months. This is reflected in the fact that most investors buy into the utility sector for dividends and the safety of lower price volatility.

Conclusion

How can we best put this information to use? Many sectors show strong cyclical patterns for various reasons. In those months with very high probability of gains or losses, it is best to adjust your investment strategy to generate the most benefit for your portfolio. Here is a matrix of the highest/lowest probability gaining ETFs for each month as we head into 2019:

Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Winners
XLI XLB XLV XLV XLV XLI XLI XLU XLB XLP
XLP XLK XLK XLK XLK XLE XLF XLI
XLV XLY XLP XLF
XLE XLU XLI XLY
XLB XLY XLK
XLP XLF XLV
XLI XLU
Losers
XLE XLP XLP XLE XLK XLB XLB XLV
XLI XLF XLY XLF XLE
XLF XLE
XLP

Sector ETFs in the winners' section had a 75%-100% probability of gains in these months since 2015 with average net gains. Sector ETFs listed in the losers section had a 0-25% probability of gains in these months since 2015 and average net losses.

Legend:

  • Consumer Discretionary Sel Sect SPDR ETF (XLY) +63.07%
  • Technology Select Sector SPDR ETF (XLK) +80.91%
  • Industrial Select Sector SPDR ETF (XLI) +45.41%
  • Materials Select Sector SPDR ETF (XLB) +21.41%
  • Energy Select Sector SPDR ETF (XLE) -5.78%
  • Consumer Staples Select Sector SPDR ETF (XLP) +24.82%
  • Health Care Select Sector SPDR ETF (XLV) +40.45%
  • Utilities Select Sector SPDR ETF (XLU) +36.17%
  • Financial Select Sector SPDR ETF (XLF) +43.00%

All the very best to you and I hope this analysis provides additional advantages for you in the months ahead!

JD Henning, PhD, MBA, CFE, CAMS

Disclosure: I/we 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.