Equity Seasonality and Bear Market Sector and Stock Selection

NYSE:ABBV   AbbVie Inc.
Seasonalities are regular and predictable patterns that recur every calendar year. Every industry exhibits unique seasonal trends that are based on fundamental drivers. The best-known seasonal drivers include harvest periods, the timing of interest payments, weather, and investor sentiment. At certain times of the year, tax and balance sheet deadlines, annual or quarterly financial reports, as well as traditional patterns, such as the year-end rally in the stock market all create regular seasonal tendencies. These patterns occur across individual equities, commodities, and indices. Statistical analysis of these seasonal trends and patterns can be an extremely important part of a trading approach. In this piece, we combine this seasonal approach with our approach to sector investing in bear markets to provide examples.

When the S&P 500 hit bear market territory on June 13 2022, many investors were left with the bitter taste of disappointment. But this wasn’t happening for the first time: since 1928, the S&P 500 has experienced 26 bear markets.

“Bears” are part of normal market trends. They are relatively short in duration (especially compared with bull markets), and can provide good investment opportunities. They come into existence when a market falls by at least 20% from recent highs.

In our process, we combine balance sheet analysis, sector selection and seasonality. During bear markets, it’s important to concentrate on good balance sheets in “recession-proof” sectors. Most stocks suffer during a recession, but there are sectors that are much more likely to outperform the broad market.

In my previous Seasonal Insights, I have discussed luxury stocks (these insight pieces are available on our website) that have proven their strength during difficult times. It is an industry that resists crises: luxury customers, due to their financial wealth, recover very quickly.

Stocks that tend to outperform during bear markets can be found in defensive sectors, such as consumer staples, utilities and healthcare. Healthcare is a great example of a haven. One of the stocks to consider from this sector is pharmaceutical giant AbbVie. AbbVie is known as a “low-volatility dividend aristocrat.” This posh expression refers to a group of high-quality S&P 500 stocks recognized for delivering at least 25 straight years of dividend growth.

If you decide to enter this trade you should consider its seasonality. Seasonality will offer you the best entry and exit points for a specific stock during the year. It will also prevent you from investing in a name that is entering a seasonally weak period.

Keep in mind that a seasonal chart depicts the average price pattern of a stock over the course of a calendar year. It is calculated over several years (unlike a standard price chart that simply shows stock prices over a specific time period). The horizontal axis depicts the time of the year, while the vertical axis shows the level of the seasonal pattern (indexed to 100). From the chart above, it is clearly visible that the end of October until the end of December, over the past 9 years, have been favorable months for this health stock.

In this time span of 46 trading days (from October 24 until December 30), shares rose on average by almost 14%. Moreover, since 2013 the pattern returns had a winning strike of 100%, meaning that AbbVie Inc generated gain each year since 2013 during the selected time period.

There are also other stocks that are trending high in this sector, such as Pfizer, Eli Lilly, or even insurances like United Health, Anthem and Centene.

Another consequence of a recession is that many consumers will curb their spending. However, consumers still need to buy staples such as food, household goods and hygiene items. Demand for these tend to hold up better than other areas of the economy.

Large food manufacturers such as Tyson Foods, Kellogg and Mondelez International all fall into this category as do large agribusinesses that focus on the raw materials used in food production, such as Bunge or Archer-Daniels Midland.

During difficult times, consumers also tend to look for cheaper alternatives from discount retailers. Even if people shop less during a downturn, they still need to buy staples, and are more likely to treat themselves to a cheaper item at a discount store. Dollar Tree was the best performer in the S&P 500 during the 2008 financial crisis, and was up significantly that year even as the overall market plummeted.

There are also personal care and household product manufacturers such as Colgate-Palmolive and Procter & Gamble. All these stocks suffered a smaller decline than other areas of the stock market during the 2008 financial crash and most of them bottomed out months before the broad market.

But still be aware of the investment timing. Each stock mentioned here has its strong and weak periods during the year. For instance, Kellogg is worth considering after the August – September period of weakness.

Remember, for every bear market, a bull market follows.

Yours sincerely,
Tea Muratovic
Co-Founder and Managing Partner of Seasonax
Guest Author for CMT Association

Many of the topics and techniques discussed in this post are part of the CMT Associations Chartered Market Technician’s curriculum.

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