As Sam Sees It: A 2012 Portfolio-Building Strategy to Consider

Sam Stovall  |

Each week, we tap the insight of Sam Stovall, Chief Equity Strategist for S&P Capital IQ, for his perspective on the current market.

EQ: We've talked a lot about the January Barometer and what it could mean to the broader market for the coming year. But in this week's Sector Watch, you discuss how investors can build a portfolio around this indicator. Can you tell us more about that?

Stovall: I first heard about The January Barometer in The Stock Trader's Almanac, and basically, it says that as goes January, so goes the year. So if the market is higher in January, then interestingly enough, the market has been higher all year about 88 percent of the time since World War II. It's not as good of an indicator when it's a down January, but still, the average price change has been negative since WWII. So you have to at least acknowledge that January can be a good indicator. I think a lot of it has to do with behavioral items. In a way, investors are like dieters because they look to January as a new beginning. So I thought that if it works for the market, then why wouldn’t it work for sectors and sub-industries within the market?

To answer this, I looked back to the 1970s for the performance of sub-industries in the S&P 500, and back to 1990 for sectors within the S&P 500. I found that the January Barometer is actually a good way of selecting sectors and sub-industries. What I mean by that is if on Feb. 1, you invested equally in the three sectors that posted the best returns in the month of January and held them until Feb. 1 of the following year, you would've received a compound rate of growth of 8 percent as compared with 6.6 percent for the S&P 500. If you bought the worst performers in January, you would've underperformed the market with a 5.5-percent return. That's what it shows for sectors and the same holds true for sub-industries.

EQ: The best-performing sub-industries posted an even more impressive track record. Can you talk about the performance of investing in the best and worst sub-industries?

Stovall: When you become a little less diversified, then you tend to benefit from extremes--either to the upside or the downside. Therefore, this indicates that the January Barometer works for even sub-industries. What I have found is since 1970, the compound rate of growth for the 10 best-performing sub-industries based on their January performance was 14.4 percent as compared with the 6.8 for the S&P 500, and the 4.0 percent for the worst 10 sub-industries in the S&P 500 in that January.

Well, I’m the kind of person that likes to go for the average price change as well as the frequency with which this technique has been successful--like a batting average, if you will. What it shows is that the best-performing sub-industries in January went on to beat the market in the subsequent months 69 percent of the time, so nearly 7 out of every 10 years. The worst performing groups outperformed the S&P only 38 percent of the time. Again, it indicates you’re better off sticking with the winners rather than the losers.

EQ: What are a few stocks that investors might want to look at when considering their own January Barometer portfolio?

Stovall: If you wanted to go with the sector portfolio approach, since the Financials, Materials and Technology sectors were the best performing in January, you might want to take a look at the Financial Select Sector SPDR (XLF), Materials Select Sector SPDR (XLB), and Technology Select Sector SPDR (XLK).

If you did want to go down to the company level, because there are very few ETFs that mimic sub-industries of the S&P 500, then the 10 companies (one for each sub-industry) would be:

EQ: Lastly, the New York Giants defeated the New England Patriots in the Super Bowl on Sunday. So this means the market is headed up for the year, correct?

Stovall: Well, of course the Super Bowl Theory, which was popularized by my father Robert H. Stovall back in the early 1970s, says that if a team from the original National Football League wins the Super Bowl, then the market will go up. Inversely, if a team from the American Football Conference or the old American Football League, wins the big game then the market is likely to go down.

In 2011, the market had to go up since the two teams--the Green Bay Packers and the Pittsburgh Steelers--were original NFL teams. So even though the Steelers were in the AFC, because they were members of the original NFL, they too would point to an advance for the year. In 2012, the New England Patriots were an old AFL team, so had they have won, then the indicator would have been pointing to a down year. As a result, all who follow this—whether devotee or at least with tongue-in-cheek—were happy that the Giants pulled out the victory.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not necessarily represent the views of Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to:

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