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