January 2013 Barometer Says Overweight These Sectors

I understand that statistics don't much matter when you land on the fat tails, however it would be short sighted to completely ignore what the numbers are attempting to tell you. For example, let's run through the stats of a lesser known version of the January Barometer and use it's guidance for positioning our portfolio over the next 6-12 months.

Obviously, January posted an exceptional gain for 2013, seeing the S&P rise slightly over 5%, and small caps rising about 5.5%. Since 1950, when January finishes in the green, 88.7% of the time the year ends with a gain equal to or greater than the gains made in January. However, this doesn't actually help anyone position their portfolio unless the plan is to throw some money in the index ETF's and ignore them the rest of the year. So, how do we determine where to position ourselves over the coming months? Let's dig into the January performance metrics of the major sectors and follow their lead.

Here's a snapshot of sector performance across the broad market. Notice that Energy, Healthcare, and Financials led the way:

Instead of simply looking at the broad index performance during January, diving into the sectors unlocks the potential to greater profits. According to Sam Stovall, if an investor buys into the top leading sectors as measured during the month of January in any given year (purchase date sometime during February), a year from now that individual will have outperformed the broad index by about 2%. Not bad... but my personal style tends to be much more aggressive than looking for small percentage growth potential. Let's take a closer look at the sub-industries of these sectors and narrow down the source of the momentum behind these moves.

According to the S&P GICS Scoreboard, the following sub-industries posted the highest gains:

Specialized Consumer Services	+22.6%
Office Services & Supplies	+19.9%
Health Care Facilities	+19.6%
Oil & Gas Refining & Marketing	+18.1%
Office Electronics	+17.4%
Investment Banking & Brokerage	+16.8%
Computer & Electronics Retail	+15.3%
Life Sciences Tools & Services	+13.7%
Trucking	+13.7%
Homebuilding	+13.5%

The highlighted areas indicate the strongest sub-industries of the major sectors discussed above. If we check the statistics regarding sub-industries, buying top performers based on January's results typically beats the broad index by 8%. Not only does potential performance jump, but we can quickly narrow our search, focusing our screens on sub-industries of the market that are in the beginning stages of institutional accumulation. Understand, February is historically a weak month for equities, especially in the year after an election. Use this to your advantage and build positions in the above sectors while they go on sale.

There is a caveat to the above. Statistics are just statistics. Any year could be the year where we apply the above strategy and land on the fat tails of the bell curve - there are no guarantees. However, one certainty I've learned from the market is we cannot control the amount of profit we can make. The only thing we can control (to a certain extent), is our risk tolerance. Setting stops at technically precarious levels ensures a loss of an amount predetermined to be acceptable by you. "Mental" stop levels are also an option, however this sets up the potential for emotions to take control at a time when emotions must be completely eliminated from the equation.

Either way, respect your risk levels.

Market News and Data brought to you by Benzinga APIs