Alpha Power Investing Newsletter

April 1, 2019

Seasonality in U.S. Domestic Sectors

In our February 2019 newsletter, we highlighted the fact that seasonality in the stock market is a global phenomenon. In our March 2019 newsletter, we highlighted the fact that seasonality is very pervasive among a wide variety of U.S. domestic index categories (growth, value, size, dividend stocks, low volatility, etc.). This month we will drill down and take a closer look at a wide array of stock market sectors to see if seasonality is a factor there.

The U.S. Domestic "Power Zone"
At Alpha, we define the U. S. domestic "Power Zone" as the months of November through May. The phrase most commonly associated with this period is "Sell in May and Go Away". We refer to the remaining months of the year - June through October - as the "Dead Zone." In this newsletter we will analyze the performance of a variety of U.S. stock market sectors during the "Power Zone".

Fidelity Sector Funds as a Proxy for Market Sectors
In the early to mid-1980's, Fidelity mutual fund family began opening a series of FidelityŽ Select sector funds. We will use these funds as a proxy for the stock market sectors that they cover.

Our Measure of Consistency: Five-Year Rolling Rates of Return
A single five-year return simply measures the change in value of something over the most recent five years. Five-year "rolling" returns simply involve looking back five years on a specific date each year over a period of time and measuring how often a five-year gain is achieved as well as the magnitude of the average five-year gain (or loss).

While past performance never guarantees future results, a high percentage of positive returns over previous five-year rolling periods may suggest a higher degree of consistency than a lower percentage of positive returns.

Holding ONLY during the "Power Zone" for Five-Year Rolling Periods

  • For our test, we will look at a list of FidelityŽ Select sector funds.
  • We will track the cumulative gain or loss achieved by holding each fund ONLY during the months of November through May of every year over five-year rolling periods.
  • We will then measure the percentage of times each fund shows a cumulative five-year gain (as well as the magnitude of the average five-year gain or loss).

Results
The mutual fund tickers in Figure 1 are listed in order of when monthly total return data is available from the PEP database from Callan Associates.

Column 1: Fund Ticker and Sector
Column 2: First year of available data
Column 3: # of five-year rolling periods tested
Column 4: # of five-year rolling periods that showed a gain
Column 5: % of five-year rolling periods that showed a gain
Column 6: % of five-year rolling periods that did not show a gain
Column 7: Average five-year % gain or loss

The key thing to note in Figure 1 is the extraordinarily consistent performance of the stock market - across a wide variety of unrelated market sectors - during the "Power Zone":

* Over half (56.4%) of the funds/sectors showed a gain during 100% of all previous five-year rolling periods considered.
* 82% of all funds/sectors showed a five-year rolling gain at least 90% of the time.
* 38 of 39 funds/sectors considered (or 97%) showed a five-year rolling gain at least 80% of the time.

One Example Highlighted
To fully appreciate the stark contrast in sector performance during the "Power Zone" versus the "Dead Zone", let's take a closer look at the fund at the top of the list in Figure 1, ticker FSELX - FidelityŽ Select Semiconductors. Figure 2 displays the cumulative % growth achieved by holding ticker FSELX ONLY during the months of November through May starting in November 1985 through May 2018.

Figure 3 displays the cumulative % growth achieved by holding ticker FSELX ONLY during the months of June through October starting in June 1986 through October 2018.

The difference in the performance displayed in Figure 2 versus Figure 3 is stark.

Summary
As always, past performance does not guarantee future results. Still, most investors would likely be hard pressed to find a more consistently positive performance factor than the "Power Zone". Simply buying and holding any of a wide variety of stock market sectors during November through May has consistently generated gains over a period of several decades. In addition, most investors would likely be hard pressed to find a simpler, more efficient approach to achieving long-term growth of equity.

We believe that consistency and simplicity are solid cornerstones for any investment strategy.

Jay Kaeppel
Vice President and Director of Research
Alpha Investment Management, Inc.
877-229-9400
www.alphaim.net
info@alphaim.net

Disclosures and Disclaimers: Past performance is not a guarantee of future performance. The returns illustrated in the charts above do not represent actual trading and are not representative of any Alpha Investment Management strategy. The data does not include management fees, trading fees or other expenses. The illustrations are designed to quantify the effect of certain time periods (as specified) on various stock market sector mutual funds. The information contained herein does not constitute and should not be construed as investment advice, an offering of investment advisory services, or an offer to sell or a solicitation to buy any security. Before investing in any fund and/or strategy, investors should consider the investment objectives, risks, charges and expenses of the fund and/or strategy and its investment options.

The data used to construct the illustration was obtained from third-party sources. While Alpha believes the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information.  

Alpha Investment Management, Inc. is a SEC registered investment advisor located in the State of Ohio. Such registration does not imply a certain skill or training and no inference to the contrary should be made. The information and opinions expressed in this document are for informational purposes only. Any recommendation or opinion made in this document may not be suitable for all investors. The information contained herein does not constitute and should not be construed as investment advice, an offering of investment advisory services, or an offer to sell or a solicitation to buy any security.

© 2019 Alpha Investment Management, Inc.

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