Options Traders: Three fourth quarter sectors to watch

September 30, 2011 / Karen Smith

Whew! We ended the third quarter 2011 today and I for one am grateful it is done.

It has been a volatile period with our market behaving like a bipolar teenager – angry one minute, friendly the next. It has all added up to the worst 3rd quarter performance since 2008. Do we have more of this in store?

As we look forward to the last quarter of this year, it’s a great time to get a brief history lesson about market performance in recent years. We are all familiar with the phrase “past performance is not indicative of future performance”, yet we do see some reasonably strong historical evidence of overall bullish activity in the fourth quarter, particularly when the third quarter has been dismal. Since 1945, whenever the S&P 500 has experienced a pullback of 10% or more in the third quarter ( we are at over 12% at the time of this writing), the index has advanced an average of 7.2% in the fourth quarter 8 out of 9 times. Pretty impressive!

We can also look more specifically at sector performance as well. Going back to 2006, there are a few sectors that perform particularly well at the end of the year. If we look the top 100 stock performers during the 4^th quarter of these years, 24 of these come from the consumer discretionary area. This implies a strong correlation between these equities and an anticipation of a good holiday sales season. Winner here have included Priceline (PCLN), Amazon (AMZN) and Abercrombie and Fitch (ANF).

The “runner up” sector is, to no one’s surprise, technology. Nineteen of the top 100 performers come from this arena. The last 9 out of 10 years, tech has bottomed in mid-September and headed higher from that point. Winning names here include Apple (AAPL), F5 Networks (FFIV) and Sandisk (SNDK).

Rounding out the bottom of the list is the industrial sector. It has in fact been the weakest area in the 4^th quarter since 2006. There are only a select few names in this area that have outperformed during year-end. These include Waste Management (WM), Flour (FLR) and CH Robinson (CHRW).

So does all of this mean it’s time to run out and go bullish? I wouldn’t go that far. It does mean that we could hold that critical level of support on the S&P 500 of 1120 and start to have a meaningful rally into year end. Time will tell, and no doubt it will be interesting to watch!

Karen Smith
OptionsANIMAL Instructor