The old investment adage, “Sell in May and Go Away”, is as widespread as the concept of buying low and selling high. Unfortunately the logic behind the former statement is not as sound.
I want to break down the facts on this seasonal phenomenon. And then talk about how the tea leaves are lining up for investors this May.
Scare Tactics
Those writers just trying to scare you will only share the following analysis:
If you invested $10,000 in the Dow Jones Industrial Average back on May 1, 1950 and sold on October 31, 1950 and then repeated this 6 month holding approach every year through 2010, you would have actually lost $379 over that 60 year stretch.
On the other hand, the same strategy applied to the other 6 month stretch (buy on November 1st and sell on April 30th) would have produced a whopping $609,071 in profits.
Conclusion they want you to reach = Sell in May and Go Away.
Just the Facts Ma’am
The above is true. But once we pull back the curtain on the rest of the facts…it’s not really so ominous.
- 59% of the time the stock market went up from May through October.
- 5 of the last 7 years have been profitable during that span.
- Some big profitable summers recently include +18.9% in 2009 and +15.6% in 2003.
The next most logical question is: How can these seemingly contradictory facts all be true?
Because some of those losing years were disastrous like -27.3% in 2008, -15.6% in 2002 and -20.5% in 1974. So yes, a few bad apples do spoil the whole cart.
Conclusion you should now come to = Each year is different. So invest accordingly.
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How About This May? Depends on the 3 E’s
As I have shared in my recent commentary, the market is now focused on the 3 E’s:
1) European Debt
2) Economy of the US
3) East Asian Growth (aka China…but that starts with a C 😉
The US economy is currently the solid spot of the 3. And if that were the only factor involved, then the S&P would already be at 1500 given the current level of earnings and unattractiveness of other main investing options (cash, bonds, gold, real estate).
Unfortunately there are serious concerns about the other two items. Because if those problems became grave enough, then Europe and China would become the main exporters of recessions all around the World. And yes, that would lead to substantial declines in US stocks.
Here is my quick synopsis of each situation:
European Debt: A managed Greek default was never the concern. The reason why they have over $1 trillion euro in crisis funds was in case Spain or Italy went haywire. Recent activity shows that the Europeans are even attempting to build a bigger financial firewall around the problem. Odds are good that they will contain these debt issues followed by a mild to medium recession across the continent that probably won’t be large enough to derail US economic growth.
Chinese Growth: No large nation can continue to grow at 10% a year. So slowing down to the current rate of +8.1% is no sweat at all. Even +6% is the envy of all other nations. The real concern is that they created a speculative bubble that will be pierced, leading to a hard landing for their economy. I am currently not in that camp.
Why? Because China is going through a change in political leadership this year. They simply cannot afford to have any economic hardship to unsettle the nation at this time. So the government is prepared to use their deep pockets to stimulate the economy back to full strength.
Adding it all up, the market will move higher this May and beyond if the situation for the 3 E’s improves. And it will go lower if the situation deteriorates. And it will trade in a range of about 1350 to 1420 until it is clear which case wins out.
How Am I Investing My Own Money?
Those who continue to doubt this US economic recovery continue to be taught a tough lesson by Mr. Market given a 100% gain for stocks the last three years. Odds are strongest that the long term bullish trend continues to be our friend throughout 2012. However, that does not mean it will be a straight line north.
Meaning that after the big rally we just had, a modest pullback is to be expected. Perhaps to around 1300 is all that is on tap. I think that is unfurling now and may actually be over before the calendar flips to May. This will create excellent buying opportunities for investors.
Given the above, I continue to focus on stocks with two key ingredients:
1) Earnings Momentum: No surprise here as a focus on Zacks #1 and #2 Ranked stocks continues to work year after year. But that is especially true in a year where corporate earnings growth is starting to slow down a notch. So any company that is vastly exceeding expectations leading to positive earnings estimate revisions will draw the attention of other investors, with a higher share price as the natural outcome.
2) Value: With the market near the highs on the year, there are many stocks with premium valuations. During consolidation periods like we are experiencing now, excesses are usually squeezed out of stocks. So the undervalued securities offer the most compelling opportunity for investors as money will move in their direction.
If you would like some help tracking down stocks that meet both of these criteria, then I invite you to check out the 25 recommendations in my Value Investor portfolio. I project that these stocks are currently 20.1% to 70.3% below fair value.
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Wishing you great financial success,
Steve
Steve Reitmeister has been with Zacks since 1999 and currently serves as the Executive Vice President in charge of Zacks.com and all of its leading products for individual investors. He is also the Editor of the top performing service, the Reitmeister Value Investor.
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