Strategist Stovall: If you sold in May, it's time to buy; small caps, cycicals are best

Published Mon, Oct 31 20164:09 PM EDT

CFRA's Sam Stovall told investors the S & P 500 and select cyclical sectors will likely outperform during the next six months based on historical patterns. This strategy is the seasonal inverse of the old Wall Street "sell in May" adage. "Above-average asset class returns are typically seen November thru April," Stovall, chief equity strategist at the firm, wrote in a note to clients Monday. "So while uneven Q3 EPS reports, vacillating election polls and heated rate-hike rhetoric whipsaw investors' emotions, history reminds us that better equity returns may be just around the corner." The strategist cited how the S & P 500 has returned 8.6 percent on average in the November through April time period since 1970 versus the 5.8 percent average for all six-month time frames. On the flip side, the lowest average six-month return instance was May through October with a 2.8 percent return. The "sell in May" strategy was first popularized by the Stock Trader's Almanac . Large caps weren't the only area that outperformed in the November through April period. Small caps, using the Russell 2000 and S & P SmallCap 600 as benchmarks, rallied 10.2 percent versus the 6.2 percent rolling six-month average since 1979. Moreover, international equities, using the MSCI EAFE and S & P Developed BMI ex-U.S. indexes, increased 10.8 percent versus the 5.9 percent average. In terms of which sectors did the best in the November through April period, the cyclical-oriented ones such as consumer discretionary, materials and industrials were the top performers, averaging 11.1 percent, 11.0 percent and 10.3 percent returns, respectively, since 1990, according to the note. "The above-average strength in the November-April stretch ... may be aided by large cash infusions into the market, particularly during the beginning of each calendar year. Pension plans typically make large contributions early in the year. Also, bonuses are usually paid by March. As a result, 401(k) contribution limits tend to be met early in the year," he wrote. To take advantage of the call, investors can buy the iShares Russell 2000 ETF , which tracks the performance of the Russell 2000 small-cap benchmark. The Consumer Discretionary Select Sector SPDR Fund , Industrial Select Sector SPDR Fund and Materials Select Sector SPDR Fund also follow the performances of their respective S & P 500 sector indexes.

Stacey Bramhall | Getty Images

CFRA's Sam Stovall told investors the and select cyclical sectors will likely outperform during the next six months based on historical patterns. This strategy is the seasonal inverse of the old Wall Street "sell in May" adage.

"Above-average asset class returns are typically seen November thru April," Stovall, chief equity strategist at the firm, wrote in a note to clients Monday.

"So while uneven Q3 EPS reports, vacillating election polls and heated rate-hike rhetoric whipsaw investors' emotions, history reminds us that better equity returns may be just around the corner."