The Consumer Switch Strategy
Sometimes the simplest investment strategies are the best. Thackray’s 2010 Investor’s Guide describes one of these strategies.
The strategy is to own an Exchange Traded Fund that tracks the Consumer Discretionary sector from October 28th to April 22nd, and to switch to an Exchange Traded Fund, that tracks the Consumer Staples sector from April 23rd to October 27th. Since 1990, the flip-flop between sectors has been profitable in 29 of 38 trades. To put the strategy into perspective, consider the following. Over the past 19 years the S&P 500 Index has gained 157 percent. At the same time, the gain by the S&P Consumer Discretionary Index was 158 percent, while the gain by the S&P Consumer Staples Index was 277 percent. The compounded return for investors who completed the switch strategy was 1,096 percent!
Preferred investment vehicles for the strategy are Consumer Staples SPDRs (Symbol: XLP) and Consumer Discretionary SPDRs (Symbol: XLY). The Consumer Staples SPDR holds shares in the titans of everything that is part of your daily routine from Coca-Cola to Phillip Morris. Mind you these are American ETFs, which explains why a junk food company and a tobacconist are considered staples. Conversely, the Consumer Discretionary SPDR holds all of the stocks that are discretionary in nature, or at least classified in that way, including McDonalds, Walt Disney, and Home Depot. All of these stocks are part of the S&P 500 Index.
The reason why the strategy works most of the time is that discretionary stocks tend to outperform the S&P 500 Index during the November to April period when seasonal gains benefit from favourable economic events. Conversely, staple stocks tend to outperform the S&P 500 Index during the more volatile April to November period when investors are seeking safety and stability from the market’s ups and downs. The mix of safety and risk is what makes this strategy work well by investing in the appropriate sector at the appropriate time.
Investors can determine optimal times for the twice yearly switch by examining technical indicators. Short term momentum indicators against a chart showing an overlay of the two sectors can fine tune entry and exit points. The latest date for the switch from the consumer discretionary sector to the consumer staple sector occurred on May 3rd. That’s when daily Stochastics, Relative Strength Index and Moving Average Convergence Divergence recorded buy signals on the overlaid chart.
With the two plays in order, why not pair them up? In May, an investor buys a consumer staples Exchange Traded Fund on the optimal entry date and sells short a consumer discretionary Exchange Traded Fund with comparable value. A profit is made when performance between the two sectors widens in favour of the consumer staples sector. As economic uncertainties during this mid-term U.S. election year become apparent, the spread between the consumer staple and consumer discretionary stocks is expected to widen in favour of the staples sector until this fall. Make this strategy a staple in your portfolio.
Jon and Don Vialoux are authors of free daily reports on equity markets, sectors, commodities, equities and Exchange Traded Funds. Reports are available at http://TimingTheMarket.ca and http://EquityClock.com
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