Market Pulse: Sell in May and go away?
May 14, 2014
Depending on how you are invested in equities, it's either a good or bad year. Large-cap dividend paying stocks have done well.
Growth stocks haven't. Is it time to move to the sidelines. Should we "sell in May and go away, and not come back until Labor Day?"
There is something to the sell in May talk. If you look at all of the six-month periods, the May through October period is historically the weakest.
Jay Kaeppel, author of "Seasonal Stock Market Trends," performed a more in-depth analysis. Kaeppel found that the first three trading days in May are typically bullish, but then weakness sets in.
Here are the specifics:
The six-month period between the third trading day in May through October is often a bad time to own stocks. Starting in 1960, if you invested $1,000 in the Dow Jones Industrial Average each year only during this six-month period your account would have decreased to $599. That's a 40 percent loss.
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If, however, you invested in the other six month period (Oct. 31 through the third trading day in May) the initial $1,000 portfolio would have grown to $47,280. That's a 4,628 percent gain.
This isn't to imply this works every year, but you can see over the long term the stock market's gains typically come from Oct. 31 through early May.
In his blog, Kaeppel reported the "Sell in May" theory works most often whenever the S&P 500 falls by at least 5 percent between Dec. 31 and April 30.
Since 1960, if the S&P 500 fell at least 5 percent sometime in the first four months of the year, then investing in May through October resulted in a cumulative 60 percent portfolio loss.
Unfortunately, the S&P 500 fell by 5.7 percent in January so this bearish setup is triggered.
So should we sell? Not in my view. The Dow and S&P 500 reached a new high this week because it remains a TINA (There Is No Alternative) environment.
Sitting in cash isn't investing and there are limited opportunities in fixed income after their 2014 rally.
With interest rates remaining low, the more stable dividend paying stocks will continue to do well.
David Vomund is an Incline Village-based fee-only money manager. Information is found at http://www.ETFportfolios.net or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.
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