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
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Strong/weak sectors in October

There have been no sectors that have consistently out-performed the market in October.

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

Sector TIDM
Automobiles & Parts
Construction & Materials
Electricity
Equity Investment Instruments
Food & Drug Retailers
Health Care Equipment & Services
Household Goods
Industrial Transportation
Life Insurance
Pharmaceuticals & Biotechnology

 

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Strong/weak sectors in August

Strong sectors

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

Sector TIDM
Food & Drug Retailers
Gas, Water & Multiutilities
Health Care Equipment & Services
Household Goods
Software & Computer Services

 Weak sectors

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

Sector TIDM
Chemicals

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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

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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 have been no consistently strong or weak sectors in June.


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Quarterly sector strategy

In the Almanac the performance of the FTSE 350 sectors in the four quarters of the year can be found. From this data the sectors that have been the strongest in each respective quarter can be identified. For example, house building stocks are typically strong in the first quarter of each year, so this sector could be chosen as the strong Q1 sector.

This suggests a strategy which repeatedly cycles a portfolio through the four strong sectors for each quarter. In other words, the portfolio is 100% invested in the strongest 1st quarter sector from 31 December to 31 March, then switches fully into the strongest 2nd quarter sector to 31 June, etc. for the following two quarters, and the same thing again for the following years. The same four sectors are used each year.

The following chart illustrates the performance of such a strategy for the period 2007  to Q1 2014, with a comparison to the FTSE All-Share Index. Both series have been re-based to start at 100.

Quarterly Sector Strategy (2007-2014)

In this analysis the strategy was restricted to the same four sectors each year; a refinement would be to dynamically change the four sectors by re-analysing the latest data each quarter.

Another variation would be to hold the three strongest sectors each quarter instead of just the one sector.

Weakest quarterly sectors

As well as the historic strongest sector for each quarter, the historic weakest sector for each quarter can also be determined.

The following chart shows the out-performance of the of strongest sector for the quarter over the weakest sector for the quarter for each quarter since 2007.

Out-performance of strong over weak sectors for each quarter (2007-2014)This suggests a strategy combining the strong and weak quarter sectors.

Hedged strategy

A variation of the first strategy would be to add a short position in the weak sectors in each quarter. For example, in Q1 the strategy would be long the strongest Q1 sector and short the weakest Q1 sector.

The following chart shows the performance of such a strategy over the period 2007-2014. For comparison, the unhedged strategy from above is also shown on the chart.

Hedged Quarterly Sector Strategy (2007-2014)bThe hedged strategy under-performs the first, unhedged strategy, but experiences much less volatility. The standard deviation of the quarterly returns of the first strategy is 0.16, whereas the hedged strategy has 0.10 (for comparison the standard deviation of the quarterly returns of the FTSE All Share Index over the same period was 0.11).

Note: These strategies assume that certain sectors display a quarterly seasonality behaviour; i.e. whereby certain sectors are consistently strong (or weak) in the same quarters each year.

 

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Quarterly sector reversal strategy

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

In a recent article we looked at a momentum strategy that aimed to exploit the price momentum of strong sectors from one quarter to the next. This article looks at whether there is a reversal behaviour, i.e. where poor performing sectors in one quarter bounceback the following quarter.

The following chart shows the performance of a portfolio that each quarter is fully invested in one FTSE 350 sector, that being the worst performing sector of the previous quarter. Elsewhere, the portfolio is similar to that of the previous momentum portfolio: at the end of each quarter, the portfolio is liquidated and a 100% holding established in the weakest sector of the quarter just finished. This is held for three months, when the portfolio is re-balanced again. Each year there will therefore be four re-balancings. Only FTSE 350 sectors with at least three component companies are considered. The period studied was from 2003 to the first quarter 2014.

In the chart below the reversal portfolio (Weak SMS) is plotted against the FT All Share Index (FTAS) and also the previous momentum portfolio (Strong SMS) for comparison. The three series are re-based to start at 100.

Quarterly (strong and weak) sector momentum strategies [2003-2013]Notes-

  1. As can be seen, the reversal strategy under-performed for the first few years and then out-performed. The volatility of the portfolio’s quarterly returns (standard deviation of 0.13) was higher than that of either the momentum  portfolio (0.12) or the FTSE All Share Index (0.07).
  2. A refinement of the strategy would be to hold the two or three worst performing sectors from the previous quarter instead of just the one (which would likely have the effect of reducing volatility).
  3. 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 picture.

See also-

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Quarterly sector momentum strategy

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

The following chart shows the performance of a portfolio that each quarter 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 re-balanced again. Each year there will therefore be four re-balancings. Only FTSE 350 sectors with at least three component companies are considered. The period studied was from 2003 to the first quarter 2014.

In the chart below the portfolio (Strong SMS) is plotted against the FT All Share Index (FTAS) for comparison – both series are rebased to start at 100.

Quarterly (strong) sector momentum strategy [2003-2013]Notes-

  1. As can be seen, the momentum strategy out-performed the index over the period of the study. However, it did so with greater volatility; the standard deviation of the portfolio’s quarterly returns was 0.12, against a comparable figure of 0.07 for the FTSE All Share Index.
  2. A refinement of the strategy would be to hold the two or three best performing sectors from the previous quarter instead of just the one (which would likely have the effect of reducing volatility).
  3. 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 picture.

See also-

 

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Strong/weak sectors in May

Strong sectors

The table below lists the FTSE 350 sectors that have historically out-performed the market in May.

Sector TIDM
Aerospace & Defense
Electricity
Food Producers
Gas, Water & Multiutilities
Tobacco

Weak sectors

The following table lists the FTSE 350 sectors that have been weak in May.

Sector TIDM
General Industrials
Life Insurance
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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

 

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