Timing the Market with Healthcare Stocks: Rotation Trading Strategy Overview

This article shows a rotation strategy between healthcare stocks and the S&P 500.

The trading idea is pretty simple, but it beats the buy and hold of the S&P 500. Moreover, we believe this strategy is more rational than at first glance. Keep reading for more details:

It’s based on seasonalities among the two assets/sectors and switches once per year. We are uncertain if it’s tradeable, but that is of course up to you.

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The strategy owns healthcare stocks from the end of April until the end of September and owns the S&P 500 from the end of September until the end of April.

It’s pretty well known that the adage “sell in May and go away” is not a myth:

Sell in May and go away recap:

The chart below shows the S&P 500 from 1960 until June 2021 by being invested from the close of April until the close of September every year:

100 000 invested in 1960 has compounded at a measly 0.1% annual return!

Compare this to being invested from the close of September until the end of April:

The CAGR is 8.1%. Even better, the drawdown is reduced from 55% (buy and hold) to 48%. We used free data from Yahoo/finance and the ticker code ^gspc. This is a cash index and doesn’t include reinvested dividends. Thus, the real returns are slightly higher if dividends were reinvested.

Healthcare stocks perform well during the summer:

However, it turns out there is a sector of the stock market that performs pretty well during the doldrums of the summer: healthcare.

As a proxy for healthcare stocks we use Fidelity’s healthcare fund:

FSPHX: Fidelity’s healthcare mutual fund holdings:

Why do we use FSPHX? Mainly because we get data back to 1981 – much longer than any ETF on the market. Second, the fund holds a pretty diversified portfolio of healthcare stocks.

The current ten biggest holdings of FSPHX are these:

Keep in mind that FSPHX is an active fund – not a passive one.

Fidelity Healthcare Fund (FSPHX) seasonalities:

Let’s first measure how Fidelity’s healthcare fund performed during the best period for stocks overall, namely from October until May:

It turns out the performance is substantially lower than the S&