A note to reader Dr RG about sell in May and go away.,

That Wall Street adage goes back to the pre-air conditioning days when downtown Manhattan was intolerable in the summer. Big bankers went off to Newport RI in their yachts or to Saratoga or Kennebunkport or Hyannis. Jewish ones went elsewhere, in my family, to take the waters in Baden Baden (in the 1920s in Germany!) because they were not welcome in US resorts.

It was to get away from the heat. They were out of touch. Few ticker tape at the spa or the “bungalow”. They could not trade. Because everyone was away volumes were low and Wall Street dormant.

Those days are gone. If you are going to be somewhere unreachable, sell or put stops on your holdings to avoid a disaster. But as a general principal it does not work. (See below.)

If you use the Dow Jones (DJIA) as a proxy for the market, Sell in May usng Memorial Day and Labor Day as the parameters but one issue is what date in May you sell at.

Here are the results:

May sale (date) Sept repurchase (date)

2009 8404 (28) 9441 (4)

2008 12638 (30) 11517 (2)

2007 13633 (30) 13449 (4)

2006 11094 (30) 11406 (6)

2005 10461 (31) 10447 (2)

2004 10188 (28) 10266 (4)


According to this informal tally, you only made significant gains doing this once in the past 6 years, in 2008. You would have not made enough to cover your commissions in the only other years when the repurchase were lower.

What about international? It would have to be in local currency and that is a tough statistical exercise.. Historically, the London Stock Exchange also had (shorter) summer doldrums but it would not work in the Southern Hemimispher or in places where the summer is not the worst weather of the year.

Remember that while markets correlate, the principal driver for non-US shares is the home market, not ours. Remember that currency trends can push down all equities for example from European markets right now. And when Wall Street goes nuts, as yesterday, it will also affect the trading of foreign equities here, is less dramatically than home-grown USA equities. You don’t want stop loss orders in yesterday’s market, discussed below.

Another adage not worth following is that the Chinese stock market is a bellwether for the world 3 months later. China is a closed market with f exchange controls. China is a young market lacking experienced non-institutional investors. It is easily roiled up or down. The big selloff in Nov. 2006 had nothing to do with our future financial crisis. The weakness post-Olympics in 2008 and earlier in 2010 also was generated from local conditions along with recent strength. Today’s fall was of course not predictive for Wall St. but a reaction to it.

It’s improbable that a stock market from a poor emerging market with a tiny investing class and a Communist elite would have much of influence on the bourses other countries with different systems. China is integrated into the world trade system and its economy does matter. The yuan matters. But the exchanges of Shenzhen and Shanghai run in a closed ssytem.

Lately Shanghai and Hong Kong are increasingly converging, according to Michael Kurtz, of Macquarie Securities. He cites a few reasons.why you have to watch Shanghai more closely now:

First 47% of HK’s market cap (or US$1,733bn) is now dual-listed on the mainland, and these stocks make up 46% of China’s A-share market cap. Michael adds:

“As China’s regulators continue expanding both outbound Qualified Domestic Institutional Investor (QDII) and inbound Qualified Foreign Institutional Investor (QFII) channels – and introduction of mainland index futures trading and short-selling facilities continues — opportunities for dual-market arbitrage will broaden and pressure for longer-term convergence between A- and H-shares increase.”

But he also cites some marks of immaturity in Shanghai which are worth remembering by global investors:

“Low dividend yield creates a capgains-oriented trading market. The average A-share holding period is just 3.5 months. This reflects the absence of a capital gain tax, and a dividend yield too low to justify holding equity. The resulting quest for cap-gains to drive aggressive trading is pushing disproportionate funds into small-caps.”

Last night Reuters reported that the plunge in the DJIA – of just under 1000 points, its biggest intraday point drop ever — may have been caused by “fat fingers”, an erroneous trade entered by a big Wall Street bank trader The guess was that the trade was in the so-called E-Mini, an index futures contract traded on the Chicago Merc platform which tracks the S&P 500.

Both the NYSE and Nasdaq today busted trades that were up or (mostly) down 60% after 2:30 pm yesterday. The main stocks affected were P&G, 3M, and Accenture but there are plenty of others.

Limit stop loss orders led to many sales that investors wish had not happened. They also caused a few serendipitous purchases at cheap prices.

Note that there will be no issue next Wednesday because of the Jewish feast of Pentecost (Shavuot).

More about our trades yesterday for paid subscribers follows. Most of it is about US trades and Canada news. Nothing from Pristina today. One note about British and Dutch stocks doing drugs. And one item from France and South Africa.