May 20, 2013 / 7:56 PM / 5 years ago

WASIK COLUMN-Two ways to pick your summer stock retreat

By John Wasik

CHICAGO, May 20 (Reuters) - It used to be easy to abide by the old Wall Street nugget that you should pull out of the market in spring and come back in the fall.

But research shows that it doesn’t make sense to completely abandon the stock market during the summer months, particularly when it comes to individual sectors. Not all of them will decline.

There are several ways to seize gains if you want to make some portfolio adjustments. Here are two approaches.


For those who remember the nasty summer of 2011, when stocks got blistered by European and U.S. debt fears, it didn’t hurt to be in dividend-paying companies that Wall Streeters consider defensive plays. While not immune from market declines, their prices tend to hold up better than for non-dividend payers.

According to the Leuthold Group, holding defensive stocks from May to October yielded a nearly 16 percent gain since 1990 (through April 2013) compared to 9 percent for the Standard & Poor’s 500 index.

When both trading and weather heat up, healthcare and utilities tend to outperform. Both sectors are doing well this year, with almost 23 percent and 15-percent returns through May 17, respectively.

Wall Street mavens may have already embraced healthcare as a defensive move, which is the top sector now in the S&P 500. The Health Care Select SPDR has risen 24 percent year to date and averaged 20 percent over the past three years. This exchange-traded fund holds household names like Johnson & Johnson, Pfizer Inc and Merck & Co Inc.

The Vanguard Utilities Index ETF holds Duke Energy (DUK), American Electric Power and Pacific Gas & Electric in a basket of utilities. The fund has grown 17 percent year to date and averaged 15 percent over three years. It has a 3.6 percent yield, a bonus for income-oriented investors.


Sometimes it seems like big money managers move on a whim, but they often engage in “sector rotation,” meaning they switch from one group of stocks to another depending upon valuations. Typically that translates into a herd-like drive from a popular sector to a lagging one.

In terms of today’s market, such a shift could favor the two weakest groups within the S&P 500 Index: Materials and Information Technology.

These two sectors have only gained about 9 percent and 10 percent, respectively, this year through May 17. That’s about half the 18 percent gain by the S&P 500 Index.

Buying a sector when it is out of favor can lead to healthy gains. If institutional managers are looking for bargains, this is where they might turn.

Why have these companies not enjoyed the kind of popularity enjoyed by hot consumer discretionary and financials? There’s no solid reason except that they are less in favor in a still-recovering economy. If employment and economic growth continue apace, the picture could change.

The best candidates for investing in materials and tech stocks are the Materials Select Sector SPDR, an index-based ETF that holds chemical companies like DuPont , mining firms like Freeport McMoRan Copper & Gold and International Paper Co. The fund was up 10 percent year to date through May 17 and averaged 12 percent over the past three years.

The Vanguard Information Technology ETF owns tech giants such as Apple Inc, International Business Machines Corp and Google Inc. It has risen more than 11 percent year to date and nearly 13 percent over the past three years.

Despite the appeal of anticipating the market, these seasonal moves are not guaranteed to beat any summer swoon or correction. Only make a tactical move to defensive stocks if you feel you’re taking too much risk or spooked by volatility in the general stock market.

And be sure to proceed with caution: Should you decide to bolster your portfolio in this way, you may have to sell other stock positions, which will trigger commissions if you own ETFs, in addition to possible capital gains outside of retirement accounts.

Doing nothing is a third option, naturally. If you’re happy with your general stock allocation - and it meets your objectives - you will ride the market’s wave if you hold a broad-market ETF or mutual fund, assuming stocks continue to climb.

0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below