After a rocky April, the U.S. stock market rebounded strongly in the first seven trading days of May, defying typically subdued expectations for the month.
The Dow Jones Industrial Average (DJIA) is now up 4.16%, its best start to May since 1938, when it gained 7.32%. The index rose 3.54%, marking its best start to May since 2009, when it rose 4.17%, while the NASDAQ index, up 4.40%, had not seen its best start to May since 1997. when it rose 5.89%, investor newsletter Stocks reported. Trader’s Almanac” is highlighted in the new report.
“Whether this rally can break through to new all-time highs will likely depend largely on upcoming economic and inflation data,” the report said.
“Fueled by expectations of lower interest rates, the market appears to have gotten ahead of itself and is likely to have achieved some gains, while the historical seasonal trend for this time of year is only moderately positive,” it added.
Unless the market reaches new all-time highs, the April pullback and May rally will exemplify continued volatility that is expected to persist into the third quarter and beyond. As such, The 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 industries perform best during the “worst six months”?
During the “Worst Six Months” from May to October, The Stock Trader’s Almanac compared the performance of the S&P 500 and NASDAQ with fourteen industry indices, gold and the 30-year Treasury note.
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Biotech and information technology topped the list, with biotech averaging a 6.78% gain and information technology averaging a 5.03% gain over the period. However, Biotech’s performance was based on only 29 years of data, and growth was stable only 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 gainers in its “worst six months” included health care and consumer staples, which outperformed the S&P 500. The NASDAQ, which includes May and June in its “best eight months,” was also strong, posting gains 73.5% of the time. with an average profit of 4.65%.
Consumer staples, while not posting the highest average gains, have historically grown 76.5% of the time, making it a relatively safe bet. However, the sector remains vulnerable to rising interest rates. Utilities are also noteworthy, with the second-highest success rate at 73.5%.
“At the other end of the performance spectrum, we have sectors that should be considered short selling or avoided altogether. The S&P 500 materials sector was the worst performer in 34 years, losing an average of 1.53% during the “bottom six,” the newsletter said.
“PHLX Gold/Silver was the second worst performer,” it emphasized.
However, the PHLX Gold/Silver Index is the most consistent loser during its “worst six months”, gaining only 38.2% of the time, Almanac noted.
It has declined in nine of the last eleven cycles, with the exception of significant increases in 2012, 2019 and 2020. The NYSE ARCA Natural Gas Index was the latest sector to post a loss, down 0.74%.
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Interestingly, all sectors, including gold and 30-year bonds, historically perform well in May. However, June usually marks the start of a broader market decline. While July often brings short-term recovery, August and September remain challenging overall.
“It is this window of poor performance that has contributed to October’s rise over the past 34 years,” the report said.
“Only biotech, 30-year bonds and gold (futures, as well as gold and silver stocks) could post gains in both August and September.”
Based on how many times they rose, consumer staples were the best-performing sector during the “worst six months,” while mining stocks lagged significantly. Historically, May represents a good time to rebalance a portfolio, typically allowing investors to exit long positions while the market is strong, the Almanac concluded.