It has been some time since we have noted anything on the topic of seasonality. Mark Hulbert at Marketwatch.com highlights an academic paper on the topic of the effect of seasonality on industry sectors. The paper, "The Halloween Effect in US Sectors," by Jacobsen and Visaltanachoti, is a rarity. It is an academic paper that has actionable advice attached.
The study is based on the premise that if the Halloween effect, or "Sell in May and go away" is a reality, then one might expect to see differential performance across sectors during these two semi-annual market seasons. Not surprisingly they find exactly that – some industries do better than others. Hulbert summarizes the implications.
What this means: There is a strong statistical case for avoiding some, but not all, sectors and industries over the summer months. This in turn means that, if the future is like the past, investors could improve performance simply by avoiding those industries and sectors for which summer returns are clearly inferior.
Which industries perform the best during the summer? According to this new study's authors, they fall broadly within the consumer related sectors such as food and agriculture, leisure, multimedia, and retailing. The winter months' best-performing industries, in contrast, are those in the manufacturing and production sectors, such as durables, chemicals, construction and machines.
The results are not all that surprising. If the market has shown differential returns across seasons, then we should see some spread in industry returns simply by chance. This is as a result of sectors having different betas. A strategy that focuses on reducing beta over the summer months and increasing beta over the winter months should be superior to a buy and hold strategy.
There still remains a great deal of debate over the validity of seasonality. It could very well be the case that with greater attention the system could break down. It is therefore up to each investor to approach the topic with a bit of skepticism.
However, the system laid out does have an advantage over a strict "sell in May" sort of approach. By rotating across sectors one can maintain a position in the market and avoid the market-timing nature of the traditional approach.
For more links on the topic of seasonality you can visit our archives here.