Sell in May and Go Away???

There are many adages out there when it comes to the stock market and investing:  “buy the rumor, sell the news” or “a rising tide lifts all boats,” but perhaps one of the most often heard is “Sell in May and Go Away.”  Last week we held a seminar to discuss this idea and determine if it was a good move to make in 2012.  For those of you who couldn't attend, we wanted to provide an overview of what we discussed and our thoughts on this timely topic. So what does the adage, “Sell in May…” mean?  The idea behind it is that on November 1st you invest your money in the stock market, then on April 30th you sell everything and let your money sit in cash through the summer.  Then when November 1st rolls around the next year, you invest back into the market.  Sounds like a simple enough strategy, but does it work?

As you can imagine the experts have been looking at this and analyzing it all the way back to the times of World War II.  And with all of the charts, and graphs, and historical data that is available the best answer to the question “does it work?” is “sometimes.”   In many years this has proven to be an effective strategy.  It certainly would have worked last year, but the data shows it has been a losing strategy five out of the last seven years.  In fact, based on the return of the Dow Jones Industrial Average(DJIA), 59% of the time the DJIA went up in the date range of 5/1 – 10/31 during years 1950 – 2011 (which if you followed the strategy would have been when you were sitting in cash).

So, if it has worked sometimes and not worked others, without resorting to a visit to a fortune teller or palm reader, how do you know if this is a good strategy or not?  The trick is to watch key indicators and base your decision on what you learn from them.  Here at HMC Partners, we watch 10 Key Indicators including:  Federal Stimulus, Economic Surprises, Consumer Confidence, Earnings Revisions, Yield Curve, Oil Prices, the LPL Financial Current Conditions Index, the VIX, Initial Jobless Claims, and Inflation Expectations.  Without going into the details of each and every indicator (if you’d like to do that, give us a call in the office and we’ll be happy to set up a time to discuss it with you), our overall feeling is that the majority of the indicators are telling us to stay the course and move ahead with caution, and a few even are giving us the “green light” to go.

Now, 5 – 6 months ago, some indicators were giving us what looked to be a solid red light, but as time has gone on we’ve seen the light change to yellow on its way to green.  For example, oil prices.  At the beginning of the year there were talks and fears of $5.00 per gallon gasoline.  That would indicate a big red light.  But as we sit in the middle of May, gasoline prices are actually going down.  This puts us more to a yellow or “caution” light with indications moving to green.

In all, at this time we feel that the “Sell in May” strategy is not one that is best for our clients.  As we continue to actively manage our clients’ accounts, we have already been more defensive in their allocation.  We feel that it would do more harm than good to position our clients even more defensively at this time, and feel that getting out of the market entirely would be a bad idea.  In fact, in some instances we are allocating more to specific key areas in equities.

The one thing we’ve learned over time is that things can and always will change.  We will continue to monitor these 10 key indicators and especially focus on geopolitical events, corporate earnings, and the potential effect of the elections this fall.  If we see any indicators of “red lights” we will be sure to react and adjust our recommendations accordingly.

Our promise to our clients is to stay on top of all these complicated issues, provide them with the best management advice we can give, and provide a high level of service to each and every one.  As we go into the summer we will be on watch and ready to communicate our thoughts and discuss your comfort and risk level.   If you are doing your own investing or working with someone else to manage your investments, our advice is to be sure to stay alert to the key indicators. We are happy to have a discussion with you and review your portfolio if you’d like a second look to make sure you are on track.  For our clients and for now, we don’t believe in “Sell in May…” we are sticking with a different adage, “Stay in May and Go All the Way!”

 

  • The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
  • There is no assurance that the techniques and strategies discussed are suitable for all investors or will yield positive outcomes.  The purchase of certain securities may be required to effect some of the strategies.  Investing involves risk including possible loss of principal.