Seasonal investing is a hard sell for most investors. We're entrenched in the buy-and-hold philosophy, indoctrinated to believe over the long term, markets always increase.
So a strategy that largely dictates we should buy and sell stocks in various sectors based on seasonal cycles is a bit of financial heresy.
Among the world's chief heretics is Brooke Thackray, who again will be in Winnipeg early next month for another Free Press News Café gig, hosted by PI Financial.
You may or may not recall a similar column at this time last year on Thackray, discussing the basics of seasonal investing.
This time around, in an interview with the Free Press, Thackray is offering his analysis of current market conditions and what his seasonal overlay analysis is telling him about what appears for many investors a bone-chilling time to risk their money in the market.
But first a primer for those for whom seasonal analysis is an entirely new concept: Canada largely invented this investment style, with Thackray and Don Vialoux being its foremost analysts.
Both provide their research expertise, along with Don's son, Jon, for an exchange-traded fund (ETF) called the Horizons Seasonal Rotation Fund, the only seasonal strategy fund of its kind.
In the broadest strokes, this strategy is illustrated by its catchy slogan: "Sell in May and go away." More precisely, Thackray says if you sell stocks on May 6, then buy back into the market on Oct. 28 -- year after year after year -- you'll be well-rewarded.
Certainly, the track record shows the strategy -- which involves timing the market -- works.
Thackray writes in his most recent newsletter if an investor bought and held the S&P 500 Index only during the favourable periods from Oct. 28 to May 5 from 1950 to 2012, a $10,000 investment would now be worth $1,128,103.
In contrast, if you only invested during the unfavourable period from May 6 to Oct. 27 during the same period, you would have lost $3,398.
Of course, year in and year out, there are deviations from the norm, and this year and the previous two have been bucking the seasonal trends in some respects, Thackray says.
"The first part of the year has been very similar to last year and the year before it, and I call that a three-peat, in the sense that usually the defensive sectors such as health care, consumer staples and utilities do not do well," says Thackray, president of Alpha Mountain Investments in Toronto and author of Thackray's 2013 Investor's Guide.
"They tend to be lagging sectors during the winter and spring, but this year, they've been the top-performing sectors once again."
In contrast, the consumer discretionary sector -- automobiles, media, apparel, etc. -- historically have had good track records in the first four months of the year, but for the last three years, they've underperformed.
As a seasonal investor, he reads this in the following way: Overall, investors are wary of the economic upheaval in Europe and generally concerned about the overall strength of every major economy around the world.
They are skittish, he says. As a result, the money has been flowing toward the defensive plays such as the consumer-staples sector, which includes producers and retailers of food, tobacco and typical household products we buy regardless of economic conditions.
In addition, the energy sector -- in particular, oil -- has not performed as well as it should during the first part of 2013, just as it has done for the past two years.
Thackray says these events point to a possible market correction.
But muddying the waters are that the cyclical sectors such as oil, which had been underperforming since January, have started to do well. If they continue to do well for a few weeks, it may be a sign the market will rally into May.
Still, as a seasonal investor, this speculation is somewhat trivial. By and large, his discipline demands his portfolio largely goes to cash by May 6 and moves into more defensive assets.
Among these more conservative investments are government bonds. Yes, bonds -- the oft-maligned asset class because of current ultra-low yields. Interest rates are skipping along the bottom, and they generally have no place to go but up. If you hold bonds and plan to sell them at some point, a rate hike is financial poison.
But Thackray says don't underestimate bonds' potential to rise in value over the next few months.
"Government bonds tend to be seasonally significant from May to October," he says. "That makes sense because money flows from the stock market into bonds at that time and then back into the stock market."
While May to October is typically a "steer clear of the market time," Thackray says periods during that span do offer good short-term trades for those willing to foray into the volatility.
Although consumer staples have recently done well out of season, they may still continue to do well during the summer if the normal cycle eventually takes hold, as it has the last two years. Blue-chip companies such as Procter & Gamble, for example, often perform better during defensive cycles, he says.
Gold is also generally a good summer trade. Investors want to look to buy in late July before the run-up to the winter holidays (and Indian wedding season), but they generally want out by the end of September.
"With all seasonal trades, you want to get in before the uptick and out before it reaches full swing."
Though some investors think it's a good time to buy gold now because of its recent fall in price, Thackray says its price can fall further. The same holds true with Canadian oil firms.
"Prices are really cheap in the Canadian oil sector, but they can get a lot cheaper," he says, adding another seasonally good time to buy oil starts in late July.
But this on-and-off-again trading is just noise for a lot of investors, especially for those owning mutual funds and GICs. No funds other than Horizons' aforementioned ETF are based on seasonal cycles, though some fund managers to do use cycles to time entries into a particular trade, Thackray says.
But DIY investors -- even with a long-term buy-and-hold strategy -- can use seasonal investing to time their entry into the market, he says.
Sure, many well-heeled experts are skeptical, thinking it's impossible to time the market consistently. And they're right, Thackray says.
"It doesn't work all the time -- nothing works all the time."
That also applies to buying and holding, which, he argues, actually does entail timing the market to some extent.
"Money managers are making buy-and-sell decisions based on some timed market event," he says. "Unless you're buying an index and never looking at it, there's timing going on."
Meet the master of the seasons: Brooke Thackray will be the guest speaker at Sell in May and Go Away?, a free meet-and-greet event at the Winnipeg Free Press News Café on May 4, presented by PI Financial. The event starts at 10 a.m. with a Q & A to follow. To reserve a seat, call 204-982-0010.
Buy, hold... and sell: Thackray's latest edition of his book for seasonal investing, Thackray's 2013 Investor's Guide, has taken a different tack than past renditions. Generally, it only addresses cycles for sectors and indices, such as energy and the S&P 500. But this time he's included data on seasonal trades for stocks, such as Potash Corp. and Costco. Below are summaries of seasonal cycles for these companies:
Costco: The bulk retailer is seasonally discounted at two times during the year. From May 26 to June 30, since 1990 to 2011, its stock has averaged a 5.9 per cent gain and has had a positive gain 68 per cent of the time during that span. From Oct. 4 to Dec. 1, its stock has averaged a 10.1 per cent gain and has seen an overall gain 77 per cent of the time. Both seasonal periods combined have had a 91 per cent success rate, with an average gain of 17 per cent. By comparison, the S&P 500 has had a 3.4 per cent average gain during these same combined periods, with a positive gain 77 per cent of the time.
Potash Corp.: All fertilizer stocks show a strong upward trend from the end of June to the beginning of January, he writes. But more specifically, Potash Corp. has traditionally done well between June 23 and Jan. 11. From 1990/91 to 2011/12, it has averaged a 21 per cent gain and had a positive return 92 per cent of the time during that time of year. The S&P TSX Composite, by comparison, averaged a 3.2 per cent return and posted a gain during those spans only 55 per cent of the time.