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Sell in May and Go Away?? Beware Fall 2014.



May 04, 2014 – Comments (20) | RELATED TICKERS: ELX.DL , VIAV , GIGM

 There are statistics and there are d*@m statistics.  I'm a believer that stats can be used, abused, twisted and confused, make us cry or make us amused. 

I'm certainly not going to advocate, (although some money management newsletters actually do), selling out and reentering.  Not good for taxes, accumulation, planning, etc.  I do believe in dollar cost averaging, and do believe that generally you want to ride a winner and try to keep consistency. 

Statistically, however, over a very broad timeframe, the buy in November and sell April 30th has panned out to generate the best returns.  Not counting trading fees, taxes, etc.  The theory originally, however, was simply that the summer months would be slow, volume low and not very telling as traders went to their summer homes in the Hamptons, (or country equivalent). 

In today’s connected world, I doubt there is an investor disconnect over the summer, there seems to be other reasons. Which again, besides interpretation and time frames,  is one issue with statistics; they sometimes say “what”, but not “why”. 

If someone had followed this philosophy last year, they would have missed out on about 11% of gains. (Similar in 2009 when the markets bottomed in March and inclined nicely the rest of the year). 

Statistically, one doesn’t move backwards May through November, but the 1.9% gains in those six months since 1928 are trounced by the 5.1% gains November through April.   There have been more 20% market corrections (8 of 10) in the May to November months, and since 1979 bonds have outperformed the markets in those months. 

Blame Wars, financial crisis, mid-term elections or anything you want. Twist the stats anyway you care to.  I’ll play my gut, which is generally just as accurate or it means I was so busy researching stocks that I missed a meal.  I have been blogging lately about the shift in sentiment between high risk, high P/E stocks, biopharms, and social media to firmer equities such as utilities and dividend paying stocks.  (REITs for example).  Those with easier to justify P/E’s and other metrics. 

The Dow is actually setting new highs while some sectors are down 15-20%.  During the earning season many stocks have been getting 10-25% share price corrections, especially if they miss the quarter and guide down.  Reasons for guiding down or forecasting lower seem to be a combination of “the weather”, tightening market, and deferred orders with longer approval cycles. 

My gut tells me that this is a correction cycle pending.  The sideways market is masking sentiment and a business cycle.  Last year’s market records came from a paper improvement in financial metrics, hiring, consumer spending, and meeting, beating market expectations.  When this happens the bar ends up set too high.  Tech companies are a good example of this and an area I’m most familiar with.  You can read my pitches or look at the 90 day chart for GIGM, ELX, JDSU, IMPV, etc.  Some hitting metrics, some beating, but guiding down.  What happens (not just techs) in this type of cycle is that last Oct. 2013, company A forecast out a year.  In January, they did okay, forecast out again, but realized they needed to cut internal spending to squeeze out an extra penny or two to meet that that forecast.  They defer some orders or some spending, trim a little head count, squeeze and meet, but can’t keep the trend up and eventually guide down somewhat. Company B received a deferred order from Company A and couldn’t book it, and missed estimates.  They deferred some of their own spending and hope to meet estimates next quarter, but company D up and cancelled an order to “fix their misaligned forecast).  Round we go until the dust settles and meeting or beating earnings causes the bar to be lowered and share price to be “right sized”? 

Personally, this penny crimping to try to satisfy investors is a setup for a fall, just delaying it.  It hurts companies work flow and morale by cutting off needed resources. Many companies try to avoid forecasting, but then "analy"ists do it for them.

To think hiring exceeding the layoffs and the unemployment rate dropping will save them by getting the market giddy enough to overlook the cycle is not going to work.  If employment is rosy, then we worry the Feds will take action on the loose monetary policy.   If it is bad we blame it on the weather, but then the weather gets better, numbers are better, but someone reads the fine print and sees that the “unparticipating” rate of the workforce has risen to a 30 year high. 

Ukraine – Russia becomes another dampener on a dampened market.  China growth rate slows, negativity rains).  (Not going there about China factories and businesses moving further into the suburbs because wages are growing too high near the cities, but look it up).  These get added to the I need an excuse to sell line.

So what does a "mostly bull" do while not being cannon fodder for the bubble bursting nonsense.  I think some parts of the market can move sideways or slightly down. I don’t think we are going to crash in a bubble kind of way, but I think this is the stuff that August – October “corrections” are made of.  Aka, Fall 2011??  Or the 8 in 10 from May-October.  No, I’m not a sell in May and go away kind of person, but I am a lighten up a little, save some ammo and don’t be too hasty to use it kind of guy.  I’m not a SKY is Falling sort of person, but I do see trends. I am careful to note, however, that I’m not big on statistics (if you can’t tell), but I do consider them.  So I just have my gut, maybe I missed a meal…… 

Disclosure:  I’ll buy things that fall 30%, sometimes getting nicked, but I won’t buy everything that drops 30%. 

A trend is a trend until it’s not.


The Sky is not Falling today, but then again it is May.

Check back again in September/October. 


20 Comments – Post Your Own

#1) On May 04, 2014 at 7:17 PM, valunvesthere (22.61) wrote:

remember the old maxim: correlation does not imply causation 

According to Super Bowl Indicator the stock markets should be in decline because the Seattle Seahawks a AFC team has won the Super Bowl


Super Bowl Indicator (Super Bowl Rule), Difference Between January Barometer and January Effect.

January 29, 2014 – Comments (3) | ADD RELATED TICKERS  


#3) On February 03, 2014 at 1:51 AM, Húshuobadào (32.75) wrote:


Investopedia explains 'Super Bowl Indicator'

Though historically speaking the Super Bowl indicator boasts an 80% accuracy rate, remember the old maxim: correlation does not imply causation. In 2008, despite the New York Giants (NFC division) winning the Super Bowl (indicating a Bull Market), the stock market suffered one of the largest downturns since the Great Depression. Though the indicator is an interesting take on predicting the stock market, by no means should the correlation dictate an individual's portfolio construction.

Hopefully in 2014 the Seattle Seahawks (AFC division) winning the Super Bowl (indicating a bear market), the stock market will experience record breaking advances in the history of the stock markets.

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#2) On May 04, 2014 at 8:52 PM, constructive (99.97) wrote:

I think the more dangerous parts of the market include social media, cloud software, biotech, Europe (especially financials), energy and solar.

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#3) On May 04, 2014 at 8:52 PM, awallejr (56.95) wrote:

At #1 Nope Seattle was not part of the original league.  Only applies to ORIGINAL league members.

As for May, it really is my least favorite month. Only time I was green was in 2009 and slightly last year.  As of this moment my real life portfolio is at its all time high.  I had a visionary top in my head and it now hit it. And here comes May.

Since I am a perma bull I just have to take my short term lumps. Hopefully the fact that I concentrated on yield and bought what I perceive as quality stocks being beaten down despite valuation should help me weather May.

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#4) On May 04, 2014 at 9:00 PM, jiltin (45.96) wrote:

Good, you reminded me same "sell in may"...Pattern.

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#5) On May 04, 2014 at 9:38 PM, TSIF (99.97) wrote:

I left this part out:

 Historically, stocks' January performance has been thought of as an informal indicator for the market's direction the rest of the year. When the S&P declines in January, the index loses an average of 2.4% in the next 11 months, according to data going back to 1950 from Ned Davis Research. When the S&P climbs in January, the index posts an average gain of 12.3% in the next period." 

awallejr kept me from adding Seattle's win to the scale.

My sentimenter has been rocking slightly negative to neutral as the markets continue to bounce off resistance.

I'm going on the record for a minimum of a 12% decline between now and mid-October.  One of the roughest spots will be the first week of September.  Just my gut talking and I just had dinner.... 

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#6) On May 04, 2014 at 10:42 PM, TSIF (99.97) wrote:

Hmmm, gut feeling may be indigestion....I think I ate too much......

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#7) On May 04, 2014 at 10:43 PM, anchak (99.89) wrote:

Excellent post !

And very timely

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#8) On May 04, 2014 at 10:47 PM, TSIF (99.97) wrote:

Mega wrote:

 I think the more dangerous parts of the market include social media, cloud software, biotech, Europe (especially financials), energy and solar.

I think the sector based selling we are seeing, including some sharp selloffs that equal a "correction" definition will confuse things.  Would a broad market correction, if one occurred include them "again"?

I'd add techs in general to the list.

Sometimes PermaBulls need to take long naps....the bears aren't generally using their cozy caves in the summer/fall. 

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#9) On May 04, 2014 at 11:54 PM, TMFBlacknGold (79.29) wrote:

The Seattle Seahawks are in the NFC Conference. 


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#10) On May 05, 2014 at 1:07 AM, valunvesthere (22.61) wrote:


I stand corrected - the Seattle Seahawks was AFC before 2002, and is now NFC, as I had mistakenly thought.

Thanks for correcting

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#11) On May 05, 2014 at 4:57 PM, portefeuille (98.32) wrote:

The S&P500 index is close to the upper boundary of my trend channel, so it might be a good idea to sell some blue chip stocks. Then again I think it might leave the channel to the upside in the not so distant future ...


(from here)

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#12) On May 05, 2014 at 6:48 PM, TSIF (99.97) wrote:

I was eyeing that on your blog, but going out the bottom of the channel has been easier for the bears to do.  I don't see the bulls knocking it up a little bit more, they make a lot of noise, but when the chips are down, they seem to give way.

Wonder how many points on the S&P scale between the to boundry they are rubbing and the bottom?  I don't see a catalyst to break down too hard, just more sentiment downward than upward and sentiment tends to spread.

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#13) On May 05, 2014 at 7:46 PM, portefeuille (98.32) wrote:

trend line.

676.53*exp(1298^0.37/15) ≈ 1742.06.

upper boundary.

676.53*exp(1.1*1298^0.37/15) ≈ 1914.87.

lower boundary. 

676.53*exp(0.9*1298^0.37/15) ≈ 1584.84.


676.53 is the close on trading day 0 := March 9, 2009

-> trading day 1298 = May 5, 2014 :)

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#14) On May 05, 2014 at 7:52 PM, portefeuille (98.32) wrote:

#13 Thus the magic parameters are 0.37 and 15. That's what I have told people for around 5 years now. It's just a boring rally, see the comment section of this post for more examples.

Also see this chart I posted in comment #52 of that post. Breaking out to the upside would not be all that surprising considering how low the slope of the trend line has become :)


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#15) On May 05, 2014 at 8:15 PM, TSIF (99.97) wrote:

The 1996-2000 breakout had completely differnet fuel and lead to a very nasty Tech bubble.

The derisking the last few months in BIO's, Cloud, techs, social media seem to be in response to concerns that we don't get into another bubble.  I do agree the simularities are there from 89-95..but a trend is a trend until it's not.  It is interesting that we are butting the top of the trend line despite the sector selling, de-risking we have seen, some of it very heavy.  Means other sectors are taking up the money.  There is the plus that new money is pouring into the market as the leading edge of the baby boomers is trying to catch up.

So break out is one possibility, sideways another, and a pull back down to the bottom trend line is another.  The pullback down to the bottom trend line would pretty much hit my sentimeter expectations.  If we get a breakout up, I'd be worried it was built on sand, but I'd accept it from an investing standpoint.


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#16) On May 05, 2014 at 10:39 PM, awallejr (56.95) wrote:

Since in the end we seem to agree that basically anything can happen so to each his own.  I am a perma bull. I view corrections or declines as opportunities.  So I will continue to reinvest into my income stream.

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#17) On May 05, 2014 at 11:57 PM, TSIF (99.97) wrote:

Back at you awallejr.  Having a consistant strategy and a reason for what you do is what counts.  Anyone who claims success at predicting hasing  only been in the business for a day or is fibbing.

Playing the swings, especially trying to predict them is generally detrimental to long term gains. I definitely agree with reinvesting and that declines are opportunities.

But alas, some of us like to have a little fun and have our cake and eat it too, even if we usually just end up with the frosting all over our faces.

I'll risk a little ammo to time an entry.  I usually skim more off than I lose,  drive myself nuts in the process, and when I miss a little I chalk it up to the educational value, but realize no two periods, times, charts, are exactly the same.  I'll flip options in my 401K and flip them back again and then smile when I get my letter telling me how bad it is for everyone if I churn my account, threatened with trading restictions, mark them on my calendar, and hope they expire before I do it again.  I'll time my trading account and see how close I can get to the turns, knowing that if I hit one close it's an accident and not me.

So your model sounds perfect for you and maybe some day I'll settle down and stop trying to over think it, but I've got a lot to "learn yet".

All the best!  

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#18) On May 08, 2014 at 2:34 PM, constructive (99.97) wrote:

Who has two thumbs, speaks limited French, and just pulled ahead of TSIF in the CAPS rankings?

*This moi*

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#19) On May 08, 2014 at 2:44 PM, portefeuille (98.32) wrote:

You are also still pretty much my score point mirror image ;)

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#20) On May 08, 2014 at 3:30 PM, TSIF (99.97) wrote:

I've been watching you mega and your 1,000 point days during this market "readjustment"....

There are several picks that I was a hundred points down on that I closed that are dropping got most of your recent points from the "caps" bank.  I think in most cases closing picks I don't excect to ever come positive works for me and frees up space, but if the market goes sour and right sizes the bloated ones that have been getting away with it for a year or so, you can gain more points out of the old picks that were heavily under water.

I fully expected you to over take me with your accuracy. I can't do anything about that with 4,500 picks open, even though my accuracy the last two years is closer to 92%.

Porte, you and Mega make a nice pair of "lips".....

There are a lot of portfolios inversed between the players who down thumb a lot and those who upthumb a lot.  In a good market the upthumbs prevail if put on the right horses, in a down market the bloated pigs deflate.  :)

All the best to both of you!   



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