After a challenging month of April, the US stock market has staged a strong recovery in the first seven trading days of May, exceeding generally muted expectations for the month.
The Dow Jones Industrial Average (DJIA) is up 4.16% year to date, marking its best start to May since 1938, when it rose 7.32%. The index is up 3.54%, its best early May performance since 2009, when it rose 4.17%, while the NASDAQ, up 4.40%, hasn’t seen a better start to May since 1997, when it rose 5.89%. Trader’s Almanac’ highlighted in a new report.
“Whether or not this rally has the strength to reach new record highs will likely depend largely on upcoming economic and inflation data,” the report notes.
“Spurred by expectations for rate cuts, the market appears to be ahead of itself and likely to have made some gains, while the historical seasonal trend for this time of year is only slightly positive,” the report said.
Unless the market hits new all-time highs, April’s pullback and May gains illustrate the continued volatility expected to last into the third quarter or longer. As such, Stock Trader’s Almanac maintains its forecast for a turbulent period of ‘worst months’ before a fourth-quarter rally leads to a strong finish to the year.
Which sectors perform better during the ‘Worst Six Months’ period?
During the “worst six months,” from May to October, Stock Trader’s Almanac compared the performance of the S&P 500 and NASDAQ against fourteen sector indexes, gold and the 30-year Treasury bond.
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Biotech and Information Technology topped the list, with Biotech posting an average gain of 6.78% over the period and Information Technology posting a gain of 5.03%. However, Biotech’s performance was based on only 29 years of data, and its profits were only consistent 55.2% of the time. Information technology, with 34 years of data and a 70.6% success rate, is considered a less risky option.
Other top performers in the ‘worst six’ months include healthcare and consumer staples, which outperformed the S&P 500. NASDAQ, which ranks May and June among the ‘best eight months’, has also been strong, gaining 73. 5% of the cases win. with an average profit of 4.65%.
Consumer staples, while not having the highest average gains, have historically advanced 76.5% of the time, making it a relatively safe bet. However, the sector remains vulnerable to rising interest rates. Utilities also deserve attention, with the second highest success rate of 73.5%.
“At the other end of the performance spectrum, we have the sectors we should consider shorting or avoid altogether. The S&P 500 Materials sector was the worst in the past 34 years, losing an average of 1.53% during the “Worst Six,” the newsletter continued.
“PHLX Gold/Silver was second worst,” it pointed out.
Still, the PHLX Gold/Silver Index is the most consistent loser during the “Worst Six Months,” gaining just 38.2% of the time, according to Almanac.
It has fallen in nine of the past eleven cycles, apart from significant gains in 2012, 2019 and 2020. The NYSE ARCA Natural Gas Index was the last sector to post a loss, with a decline of 0.74%.
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Interestingly, all sectors, including gold and 30-year bonds, historically perform well in May. However, June typically marks the start of broader market declines. While July often brings a short recovery, August and September generally remain challenging.
“It is this period of poor performance that has boosted October for the past 34 years,” the report said.
“Only Biotech, 30-year bonds and gold (futures and gold and silver stocks) manage to post gains in both August and September.”
Based on the percentage of times they have risen, the consumer staples sector emerges as the best performing sector during the ‘worst six months’, while gold and silver mining stocks lag significantly. Historically, May provides an opportune time for portfolio rebalancing, which typically allows investors to close out long positions while the market is strong, Almanac concludes.
