6 Picks in Seasonally Strong Sectors

Just as different markets have differing seasonalities, so do various sectors, and it helps to keep these seasonal tendencies in mind so you can establish positions in stocks that are about to enter their period of strength, says MoneyShow's Tom Aspray.

It has already been a much different stock market in 2014 than it was in 2013. The Spyder Trust (SPY) moved sideways until the latter part of January before dropping almost 6% in just 11 days. The rally from those lows has pushed the SPY almost 8% higher as the market waits for the latest FOMC announcement. The new high in the NYSE A/D line on Tuesday is a bullish sign for the market.

These wide swings are what I was expecting this year as it is more like the price action of 2012. The correlation between individual stocks and the S&P is also mush different this year as it has dropped sharply. Until the latter part of last summer, most stocks moved with the market pushing the correlation close to 1.0. In early January, the 65-day average had dropped to 0.52, well below the three-year average.

This is a plus for stock pickers and it is equally important that you look for stocks in the best sectors. There are three sectors that I like, which are typically strong seasonally until late April and May. In this week's trading lesson, I would like to take a seasonal and technical look at these sectors and review six specific recommendations. (Editor's Note: many were tweeted before the opening on March 19, 2014).

The January correction hit the Select Sector SPDR Consumer Discretionary (XLY) hard as it dropped from a high of $66.85 to a low of $61.03. The rebound has been equally sharp as XLY recently made a new high of $67.85. The seasonal analysis shows that XLY forms a major bottom on or around October 11 (line 1) and then rallies up through January 10.

The next seasonal low typically comes in late February as XLY then rallies sharply until the end of April, line 2. Last year, XLY had a six-week correction from the spring high to the June low and then continued to move higher and higher into the end of the year.

This seasonal tendency is one of many that are included in John Person's latest book Mastering the Stock Market. John suggested I look at the department stores, which have a strong seasonal trend into the end of April. He also mentioned that the last quarter of employment data reflected an uptick in female employment that could add support to retail stocks that focus on women's apparel.

The chart of the department store group typically bottoms on October 25 and then tops on April 25. Given the fact that the weather has prohibited many from shopping, I would not be surprised to see them stay strong until early summer. I am looking for similar demand to hit all of the retail space in the next few months.

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