May is officially here and with that comes the usual “sell in May and go away” chatter. There is something to readjusting equity portfolios for the May through October time frame.
“On a seasonal basis, the six-month stretch from May to October is historically a weak period for the S&P 500 Index, dating back to 1990,” said S&P Capital IQ in a new research note.
That does not mean all sectors will sport scarlet letters over the next six months. In fact, a surprising pair of recently beaten down industry ETFs could be worth evaluating right now. Those ETFs are the First Trust Dow Jones Internet Index Fund (NYSEArca: FDN) and the PowerShares NASDAQ Internet Portfolio (NasdaqGM: PNQI).
Buying ETFs such as FDN and PNQI during a seasonally weak period for stocks may seem counterintuitive, especially after the ETFs were two of the worst performers in April. FDN and PNQI each lost 9.2% last month. [April’s Worst ETFs]
However, it must noted that a period of seasonal strength for the Internet sector starts in mid-April. FDN and PNQI are already reflecting that, sort of. When factoring in Thursday’s gains of about 1.7% each, FDN and PNQI are modestly higher since April 15. [Favorable Seasonal Trends Beckon for Tech ETFs]
“Starting in Mid-April, historically the Internet sector has done well. Since 2005 the Internet sector has only seen two negative years for its seasonal strong period,” according to technical analyst Andrew Thrasher.
Thrasher notes volume in FDN has recently been intense, possibly a bearish sign, but not necessarily.
“I also noticed that volume has been just destroyed in this space. Looking at the On Balance Volume indicator, which adds shares on up days and subtracts shares on down days to give an idea of buying and selling volume, it’s been knocked down to levels not since early 2013. This tells us that heavy volume has been coming into $FDN on periods of weakness. This is typically a bearish sign but it can also be viewed through a contrarian lens. Has the selling been overdone for this internet ETF?,” he said.
Although FDN and PNQI have allocations to Facebook (NasdaqGS: FB) of 6.8% and 8.3%, respectively, neither ETF is excessively weighted to social media names ex-Facebook. That is a good thing following a month in which the Global X Social Media Index ETF (NasdaqGM: SOCL) lost 14.3%.
FDN only allocates 1.56% to Twitter (NYSE: TWTR) and PNQI has no exposure to that stock. That could also be a good thing after Twitter plunged 17% last month. However, with an average weight of 7.5% to Amazon (NasdaqGS: AMZN), both ETFs will need the e-commerce to climb out of its bear market if the funds hope to move higher over the coming months. [Amazon Hurting These ETFs]
PowerShares NASDAQ Internet Portfolio
Tom Lydon’s clients own shares of Amazon and Facebook.