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Santoli: 'Bridesmaid strategy' beats the market

Traders work on the floor of the New York Stock Exchange.
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Traders work on the floor of the New York Stock Exchange.

"Better luck next year."

It's the classic put-down, veiled as consolation, that's leveled at a team that falls just short of the title at season's end.

Yet it turns out that when it comes to stock sectors, one season's runner-up often does become a winner the next year. In one of the quirkier and lesser-known market patterns, the second best-performing sector in a given year has tended to outperform the broad market over the subsequent 12 months.

The Minneapolis research and asset management firm Leuthold Group has long observed and tracked what it quaintly calls the "bridesmaid strategy" of buying the prior year's second-place sector and holding it for 12 months. In 17 of the past 25 years, this approach has performed better than simply holding the S&P 500, for a 68 percent win rate.

And by a good margin: Since 1991 (including this year's results through Friday), the annualized total return of this bridesmaid trade was 14.5 percent, compared to 9.7 percent for the S&P 500 over that span.

The strategy is working nicely this year. Health care was the second-place sector in 2014, and through Friday the group had returned 4.6 percent year to date, compared to a 0.6 percent loss for the broad benchmark. Health care has been the bridesmaid trade the past two years, in fact, and has a shot of making it a "three-peat" this year.

Health care is an interesting sector for a "what's working now" approach, because the sector, as tracked by the Health Care Select Sector SPDR Fund, is varied enough to thrive in diverse environments. It contains both growth and value characteristics and domestic and global exposures, with aggressive biotechs and demographically advantaged health insurers as well as the slow-growth dividend machines of Big Pharma.

With less than two weeks' worth of the year left, consumer discretionary stocks seem to have locked up the top spot among the ten S&P sectors, with a gain of 9 percent — thanks largely to Amazon.com and Netflix Inc.

Who is in the running for "bridesmaid" this year?

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