March: Exploiting Sector ETF Seasonality Patterns For Best Stock Gains

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Includes: AAPL, ABT, CSCO, INTC, JNJ, LABU, MRK, MSFT, PFE, UNH, V, XLB, XLE, XLF, XLI, XLK, XLP, XLU, XLV, XLY
by: JD Henning
Summary

Monthly update on the sector seasonality patterns to enhance your stock picks.

Leveraging strong patterns and technical algorithms has delivered +28.83% returns YTD.

March is the most unusual month of the year for sector comparisons, but a large ramp up to May has been the recurring story for 3 key sectors.

Introduction

Patterns tend to repeat themselves and there are connections between the past and the present. There is the old proverb that reads, 'You can't know where you're going if you don't know where you've been.'"

~ Ashwin Sanghi

Patterns by definition repeat and market sectors can have significant cyclical performance behaviors that influence individual stock performance results. This monthly analysis of sector ETF performance across nine major sectors may give you some additional insight into any recurring patterns for your investment advantage into 2019.

Sector Seasonality Matrix 2015-2019

As we head into March, there has not been any strong standout sector of the Select Sector SPDR ETFs relative to the S&P 500 over the most recent five years. This suggests the sectors typically all suffer the similar broad performance results as the major indexes during this month. However, there are sectors that have regularly underperformed the S&P 500 in March that might be worth avoiding again this year:

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
  1. Consumer Discretionary Sel Sect SPDR ETF (XLY)
  2. Technology Select Sector SPDR ETF (XLK)
  3. Industrial Select Sector SPDR ETF (XLI)
  4. Materials Select Sector SPDR ETF (XLB)
  5. Energy Select Sector SPDR ETF (XLE)
  6. Consumer Staples Select Sector SPDR ETF (XLP)
  7. Health Care Select Sector SPDR ETF (XLV)
  8. Utilities Select Sector SPDR ETF (XLU)
  9. Financial Select Sector SPDR ETF (XLF)

Analyzing the Sector Seasonality Matrix for March

The first key observation is that XLI and XLP have been top performers in February followed by large seasonal drops into March since 2015. We can see this again for 2019 that XLI gained 5.99% and XLP gained 1.42% for February. We also may expect these two sectors to continue their seasonality pattern and underperform again into March after these historically strong gains for February. The other seasonally poor performer for March has been the financial sector represented by XLF that is down -1.78% so far since the start of the month.

More analysis on the strong industrial sector returns and high money flow into key sectors was discussed in my recent article:

Follow The Money: High Inflows To Midcap, Health Care And Industrial Sectors

This article is a continuation of my overview of sector ETF analysis articles and serves to highlight sectors where additional boost from strong positive inflows and prior patterns may contribute to higher individual stock performances.

How can we benefit from sector seasonality into March?

First, if these strong seasonality patterns continue to hold for yet another year, we can start by setting up positions in historically stronger sectors. I will use the healthcare and technology sectors as two examples of how an effective setup may work to provide additional advantages. Also this pattern analysis trading behavior is likely to pull forward strong returns as investors typically try to move earlier each year to capture the largest part of expected recurring top performance.

Healthcare and technology are two historically strong performing sectors as shown below that produce increasingly higher probabilities of gains from March to May each year. Both sectors attain a 100% level for May that represents the percentage of the past five years that the fund has achieved gains for the month. XLV has achieved average gains of +1.9% over the previous months of May and XLK has averaged +4.4%, the best month for technology over this analysis period. Coincidentally, both sectors fall off after July and the best gains have been realized in the first half of the year.

Healthcare - Health Care Select Sector SPDR ETF (XLV)

4 Year Seasonality Chart of (XLV) with arrows indicating the monthly changes in the five-year average from 2018. You can see from February through May the seasonal ramp up in probability of monthly gains and average monthly returns. Watching the institutional fund flows from February to early March already confirms the early movement of funds into these sectors.

Technology Select Sector SPDR ETF (XLK)

Four-year seasonality chart of (XLK) with arrows indicating the monthly changes in the four-year average from 2018. The ramp up in probability of improved performance in the technology sector also peaks in May with an average return of +4.4% over the past four years. June remains a particularly bad performing month for this technology fund with consistently large downturns in the past four years.

Second, if we know where the strongest sector inflows are likely to be focused in the coming months, we should look at some of the best stocks in that sector and methods to capture these potential gains.

In my prior Weekly Breakout Forecast articles I have highlighted the strong inflows and technical breakout characteristics of these large-cap stocks: Johnson & Johnson (NYSE:JNJ), Pfizer (NYSE:PFE), and Merck (NYSE:MRK) that are continuing to build over the past several weeks. A focus on the largest holdings by healthcare sector funds is another way to capture the increased fund flows and expected gains through the cyclical pattern. Here are the five largest holdings for the Select Sector SPDR Healthcare fund (XLV):

Johnson & Johnson (JNJ) Pfizer (PFE) UnitedHealth Group (UNH) Merck (MRK) Abbott Laboratories (ABT)

Microsoft (NASDAQ:MSFT), Intel (NASDAQ:INTC), and Apple (NASDAQ:AAPL) have shown breakout characteristics for mega cap stocks in prior weeks as identified in my Weekly Breakout Forecast articles. A focus on the largest holdings by technology sector funds is another way to capture the increased fund flows and expected gains through the cyclical pattern into May. Here are the five largest holdings for the Select Sector SPDR Technology fund (XLK):

Microsoft (MSFT) Apple (AAPL) VISA (V)

Intel Corporation (INTC)

Cisco Systems (CSCO)

Lastly, you can harness strong weekly breakout picks or the Premium Portfolio strategies I trade regularly with an active portfolio of 20 stocks.

These and other portfolio strategies are used to capture a wide variety of key stock characteristics, sector cycles, and money flows that directly impact the performance of any portfolio. So far into March this approach is up +28.93% leveraging strong cyclical patterns and technical algorithms. The 2019 returns for January and February are shown below along with the percentage distribution by sector of top performing stocks across each month.

Through today, the top performing stocks in my Premium Portfolio by month have been distributed across the following sectors in these percentages. I'm deliberately looking to increase exposure toward stocks in the strongest past performing sectors over the next several months to capture the large expected inflows to these sectors.

Sector Distribution of Top Stocks January February March
Healthcare 35% 35% 40%
Technology 25% 25% 20%
Services 15% 15% 15%
Consumer Goods 10% 10% 15%
Basic Materials 10% 10% 5%
Industrial Goods 5% 5% 0%
Financial - - 5%

Conclusion

Patterns by definition repeat and market sectors can have significant cyclical performance behaviors that influence individual stock performance results. This monthly analysis of sector ETF performance across nine major sectors may give you some additional insight into any recurring patterns for your investment advantage into 2019. As we look at the SPDR S&P 500 ETF we can see the market beginning to fade the fourth retest of the 280/share resistance level. On a Fibonacci retracement basis, we may be headed back to support levels around 270/share at 23% declines into March.

The evidence above shows how January and February have both followed the cyclical seasonality patterns of the past five years. I expect we will see continued sector seasonality similarities through March and beyond. The historically poor performance in March is likely to be followed by the key sectors outperforming into April and May. These are opportunities to watch for in the coming weeks. I hope this perspective gives you additional trading advantages and I welcome you to examine my different portfolios for additional details.

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.