As Sam Sees It: When in Doubt, Let the Rules Rule

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.

For more from S&P Capital IQ, be sure to visit www.getmarketscope.com.

EQ: The best six months of the year is set to kick off later this week. Judging by the S&P 500’s impressive run since May, however, how much better can the market be for investors?

Stovall: The interesting thing is that some investors have wondered if the strong May through October 2013 performance will steal some of the impact of the November through April months. What I found, going back to 1945, whenever you had a strong performance of more than 5 percent from May through October, it has actually given a running start to the next six-month period. So instead of getting a 7.0-percent average increase in that November through April period, you ended up getting an 8.6-percent increase. Also, the frequency of advance did not go down either.

So if history repeats itself—and there’s no guarantee that it will—the strong May through October increase this year is actually encouraging for the next six months.

EQ: We’ve discussed your Sector Rotation strategy before, which recommends that investors avoid selling out of stocks entirely. How did that strategy fare so far since May?

Stovall: It’s underperformed the S&P 500 as a whole. This year, that strategy was up 7 percent while the S&P 500 itself was up 10 percent during the May through October period. I still regard this as a victory because investors usually like to get out of stocks altogether from May through October, adhering too closely to the “sell in May and go away” adage, rather than just gravitating toward the defensive side of the spectrum.

A 7-percent return annualized is still better than nothing at all, and it’s better than the average annual increase of 1.3 percent since World War II during this six-month period. While the market itself did even better, I still feel that this adage of staying defensive provided investors with 7 percent that they otherwise wouldn’t have had if they sold out of stocks.

EQ: Considering the environment that we’re in and the run-up we’ve experienced, do you recommend any adjustments to the sector rotation strategy or should investors stayed disciplined here?

Stovall: S&P’s sector analysts and strategists currently have an underweighting toward Materials, yet an overweighting toward Industrials and Consumer Discretionary—which are the three sectors in the November through April portion of the semi-annual rotation. But if you are looking to adhere exclusively to this rule, I would say that the rules rule and you really don’t want to go against those rules.

Who knows what our recommendations will be one month, three months, or six months from now. You can serve many different masters but if you’re focusing on The Seven Rules of Wall Street, and this happens to be one of them, then you adhere to that rule.

EQ: We’re at about the halfway mark for third quarter earnings season. Has the picture improved since the early hiccup?

Stovall: Yes, it has. Originally the thought was that we’d get about a 3.3 or 3.4-percent earnings growth, which then dipped down to 2.7 percent before moving up to around the 4.5 percent zone. So, again, we’re looking at record earnings for this quarter and likely to have a number that is closer to 5 percent than the sub-3 percent that was expected in early October.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. 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: http://www.equities.com/disclaimer

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