On a historical basis, November is indeed a strong month for U.S. equities. Over the past 20 years, the S&P 500 has averaged a November gain of 1.5 percent, tying with December as the fourth-best month of the year for the benchmark U.S. equity gauge.
As is the case with the other months of the year, November brings sector-level opportunity for tactical traders. With November being the start of what is usually a period of strength for equities, it may not be surprising to some investors that this month's best-performing sector exchange-traded funds track cyclical sectors.
Going back to 1999, the first full year of trading for the sector SPDR suite of ETFs, the best-performing fund in November is the Materials Select Sector SPDR XLB. XLB, the largest materials ETF by assets, averages a November gain of almost 3 percent, according to CXO Advisory data.
When November ends, that does not mean traders should depart XLB because the materials ETF is also the best of the sector SPDR suite in December.
Industrials, Too
Due in large part to strength in aerospace and defense stocks, the industrial sector performing well this year. The Industrial Select Sector SPDR XLI is up about 14.5 percent year to date, a performance that could be bolstered in November if historical trends hold true to form.
XLI is usually November's second-best sector SPDR behind XLB, averaging an eleventh month gain of about 2.5 percent, according to CXO.
As cyclical sectors, industrials and materials could be bid higher this month as traders anticipate a December interest rate hike by the Federal Reserve. Cyclical sectors often perform well following rate hikes with industrials being one of the best-performing group after the Fed boosts borrowing costs.
Laggards, Sort Of
Speaking of interest rates, it is worth noting that the Financial Select Sector SPDR XLF averages a negligible November gain, making it one of the worst sector ETFs in November. However, XLF could break from its usually benign November performances if traders price in an all but assured December rate hike.
The Utilities Select Sector SPDR XLU is usually the worst-performing sector SPDR in November, but that is not a grave concern. XLU typically generates flat showings in November, not big losses, according to CXO data.
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Todd Shriber owns shares of XLF.
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