Sell in May Sector Strategy (SIMSS)

The Sell in May Effect describes the tendency of the market over the six-month period Nov-Apr to outperform the market in the other six-month period (i.e. May-Oct).

The effect can be seen in the following chart, which plots the cumulative average daily returns of the market (i.e. it gives a representation of the market moves in an average year). More information on this chart can be found here.

Santa Rally [2015] 04

As can be seen the market tends to be strong from November to April, and then flat for the six-month period May to October.

An update tracking the accuracy of this effect can be found here, and further articles here.

The problems of exploiting the Sell in May Effect

Although the effect is statistically significant, it is not an easy anomaly to exploit economically. In theory an investor might be long stocks Nov-Apr and then move to cash for May-Oct. But as can be seen in the above chart, the market doesn’t necessarily fall in the summer period (except possibly the short May-Jun period), rather it is flat. And by moving to cash the investor would forego dividends paid in the May-Oct period.

It may make sense moving to cash if interest rates were high (i.e. to benefit from high returns on cash for the summer period) – but that is not the case currently. And in any case that has to be balanced with the fact that when interest rates are high expected growth rates in equities tend to be high as well (i.e. not a time to be out of the market).

One significant reason why it may make sense to be out of the market over the summer period is that volatility is much higher then than in the Winter period (as shown here). For example, eight of the ten largest one day falls in the FTSE 100 Index happened in the Summer period. Hence, not only are returns lower in the Summer, but also risk-adjusted returns are significantly lower.

But generally, this is a little frustrating: the Sell in May Effect is a significant market anomaly, but tricky to exploit.

So, what to do?

Exploit the sector rotation

One idea is to stay in the market throughout the year but to re-balance a stock portfolio according to which sectors perform the best in the two six-month periods as defined by the Sell in May Effect.

The following two tables show the performance of the FTSE 350 sectors in the respective summer and winter periods since 1999. The tables have been ranked by average returns of the respective sectors over the 17-year period.

Sector performance in the summer period since 1999

SIM sector summer performance

 Sector performance in the winter period since 1999

SIM sector winter performance

From these tables two portfolios of sectors can be constructed that have historically performed strongly in the respective summer and winter periods.

A few filters were applied:

  1. Sectors with less than 4 component stocks were not considered
  2. Sectors must have a minimum 13-year track record
  3. Standard deviation (i.e. volatility) of a sector’s returns must be below the average standard deviation
  4. Positive returns must be over 50%

The portfolios selected were-

Summer Portfolio Winter Portfolio
Gas, Water & Multiutilities Construction & Materials
Beverages Industrial Engineering
Health Care Equipment & Services Chemicals

So, the Sell in May Sector Strategy (SIMSS) is

  • in the summer period: long sectors Gas, Water & Multiutilities, Beverages, and Health Care Equipment & Services
  • in the winter period: long sectors Construction & Materials, Industrial Engineering, and Chemicals

Performance of SIMSS

The following chart shows the simulated performance of the Sell in May Sector Strategy backdated to 1999 compared to the FTSE 100 Index.

SIMSS v FTSE 350 [1998-2016]

After 17 years the SIMSS portfolio would have grown in value to 1021 (from a starting value of 100). While the FTSE 100 (buy and hold) portfolio would have grown to 111.

This simulation does not include transaction costs, but as the strategy only trades twice a year these would not significantly change the above results.


More articles about the Sell in May Effect.

Social Share Toolbar

Strong/weak sectors in February

Strong sectors

The table below lists the sectors that have historically out-performed the market in February.

Sector TIDM
Aerospace & Defense
General Industrials
General Retailers
Industrial Engineering
Oil & Gas Producers
Oil Equipment, Services & Distribution

Weak sectors

The following table lists the sectors that have been weak in February.

Sector TIDM
Electronic & Electrical Equipment
Financial Services
Fixed Line Telecommunications
Mobile Telecommunications
Technology Hardware & Equipment

 

Social Share Toolbar

UK sector performance – 2015: Y, 2H, 4Q

The following charts plot the performance of UK FTSE 350 sector indices in 2015 for the whole year, second half and fourth quarter.

Full year

Sector returns for January – December 2015

UK sector indices 2015

Second half

Sector returns for July – December 2015

UK sector indices 2015 2H

Fourth quarter

Sector returns for October – December 2015

UK sector indices 2015 4Q

Consolidated

The above three time periods (1Y, 2H, 4Q) are consolidated into the one chart below.

FTSE 350 sectors in 2015 1Y  2H  4Q

The following table summarises the data for the chart.

Index TIDM 2015 4Q 2015 2H 2015 Y
Aerospace & Defense -1.4 -9.9 -12.9
Automobiles & Parts 15.1 -7.8 -10.4
Banks 0.2 -13.1 -12.7
Beverages 6.5 9.4 8.9
Chemicals 6.9 -2.2 -4.8
Construction & Materials 10.6 8.3 25.4
Electricity 2.0 -3.0 -10.2
Electronic & Electrical Equipment 7.7 -0.8 4.9
Equity Investment Instruments 6.3 0.0 3.0
Financial Services 6.6 1.1 10.8
Fixed Line Telecommunications 11.2 2.8 16.4
Food & Drug Retailers -11.0 -19.9 -11.7
Food Producers 3.8 16.7 8.8
Forestry & Paper -3.5 -2.7 27.1
Gas, Water & Multiutilities 0.9 5.1 -3.2
General Industrials 5.7 -0.7 12.9
General Retailers -2.6 -5.2 0.9
Health Care Equipment & Services 6.4 14.1 7.6
Household Goods & Home Construction 4.2 10.3 28.8
Industrial Engineering 1.7 -16.6 -19.1
Industrial Metals 0.5 -40.5 -52.6
Industrial Transportation -1.3 -15.2 -8.1
Life Insurance 9.2 0.6 3.7
Media 4.9 4.0 13.5
Mining -14.7 -41.8 -48.6
Mobile Telecommunications 6.7 -2.1 1.7
Nonlife Insurance 6.1 18.8 27.1
Oil & Gas Producers 1.6 -14.5 -20.6
Oil Equipment, Services & Distribution -16.0 -27.4 -20.9
Personal Goods 5.3 1.4 4.9
Pharmaceuticals & Biotechnology 8.0 5.4 1.4
Real Estate Investment & Services -2.2 -2.3 14.8
Real Estate Investment Trusts -3.2 2.2 6.6
Software & Computer Services 16.1 12.7 32.4
Support Services 5.7 -3.0 5.7
Technology Hardware & Equipment 9.1 1.9 7.1
Tobacco 4.0 12.5 13.3
Travel & Leisure 7.3 8.4 12.4
FTSE 350 3.2 -3.6 -2.8
Social Share Toolbar

Quarterly sector momentum strategy (update)

Do FTSE 350 sectors display a quarterly momentum behaviour that can be exploited?

This analysis updates the performance of two strategies, defined as:

1. Strong quarterly sector momentum strategy (Strong QSMS)

The portfolio comprises just one FTSE 350 sector, that being the sector with the strongest performance in the previous quarter. So at the end of each quarter, the portfolio is liquidated and a 100% holding established in the strongest sector of the quarter just finished. This is held for three months, when the portfolio is liquidated and re-invested in the new sector. Therefore the strategy will trade four times a year.

2. Weak quarterly sector momentum strategy (Weak QSMS)

As above, but in this case it is the weakest sector of the previous quarter that is held by the portfolio. (Strictly, perhaps, this should be called a bounceback, or reversal, strategy and not a momentum strategy.)

Only FTSE 350 sectors with at least three component companies are considered. The period studied was from 2005 to the third quarter 2015.

The accompanying chart compares the performance of the two strategies, and adds the FTSE All Share Index as a benchmark. All series are re-based to start at 100.

Quarterly (strong and weak) sector momentum strategies [2005-2015]

Notes-

  1. As can be seen, both the SMS strategies out-performed the index over the period of the study. However, they did so with greater volatility (the standard deviation of the Strong SMS quarterly returns was 0.11, against comparable figures of 0.13 for the Weak SMS and 0.07 for the FTSE All Share Index).
  2. From 2012 the reversal portfolio (Weak SMS) started strongly out-performing the Strong SMS.
  3. A refinement of the strategy would be to hold the two or three best/worst performing sectors from the previous quarter instead of just the one (which would likely have the effect of reducing volatility).
  4. Costs were not taken into account in the study. But given that the portfolio was only traded four times a year costs would not have had a significant impact on the overall performance.

Extract taken from the newly published The UK Stock Market Almanac 2016.

Order your copy now!

Social Share Toolbar

Strong/weak sectors in July

Strong sectors

The table below lists the sectors that have historically out-performed the market in July.

Sector TIDM
Chemicals
Personal Goods
Real Estate Investment Trusts
Technology Hardware & Equipment

Weak sectors

The table below lists the sectors that have historically under-performed the market in July.

Sector TIDM
Beverages
Gas, Water & Multiutilities
Industrial Transportation
Support Services

 

Social Share Toolbar

Strong/weak sectors in June

Strong sectors

The table below lists the sectors that have historically out-performed the market in June.

Sector TIDM
Beverages
Oil & Gas Producers
Pharmaceuticals & Biotechnology

Weak sectors

There are no sectors that have been consistently weak in June.

 

 

Social Share Toolbar

Strong/weak sectors in April

Strong sectors

The table below lists the sectors that have historically out-performed the market in April.

Sector TIDM
Electronic & Electrical Equipment
Industrial Engineering
Personal Goods

Weak sectors

The following table lists the sectors that have been weak in April.

Sector TIDM
Household Goods
Mining
Mobile Telecommunications
Software & Computer Services

 

 

Social Share Toolbar

Strong/weak sectors in March

Strong sectors

The table below lists the sectors that have historically out-performed the market in March.

Sector TIDM
General Industrials
General Retailers
Industrial Engineering
Oil & Gas Producers
Oil Equipment, Services & Distribution

Weak sectors

The following table lists the sectors that have been weak in March.

Sector TIDM
Gas, Water & Multiutilities
Health Care Equipment & Services
Nonlife Insurance

 

Social Share Toolbar

Strong/weak sectors in January

Strong sectors

The table below lists the sectors that have historically out-performed the market in January.

Sector TIDM
Construction & Materials
Electronic & Electrical Equipment
General Industrials
Health Care Equipment & Services
Media

Weak sectors

The following table lists the sectors that have been weak in January.

Sector TIDM
Beverages
Food & Drug Retailers
Food Producers

 

Social Share Toolbar

Strong/weak sectors in December

Strong sectors

The table below lists the sectors that have historically out-performed the market in December.

Sector TIDM
Construction & Materials
Life Insurance
Support Services
Travel & Leisure

Weak sectors

The following table lists the sectors that have been weak in December.

Sector TIDM
Banks
General Retailers
Pharmaceuticals & Biotechnology
Social Share Toolbar