Being Street Smart
June 11
Sy Harding
But Go Away for How Long?
‘Sell in May and Go Away’ sure did work for the month of May, the worst May for the stock market since 1962. And so far the month of June has not been much better.
But go away for how long? Two months? Three months? July is usually a pretty good month for a summer rally isn’t it?
You could decide that, given the continuing global economic recovery, and that interest rates remain low and accommodative, the 10% correction already seen is more than sufficient and the correction is already over.
Or you might judge that the contagious debt crisis in Europe will spread, and combined with the austerity measures being imposed in European countries, will slow global economies, and that hasn’t been factored into stock prices by a mere 10% correction.
You could determine that investor sentiment remains too bullish and complacent for a correction bottom to be in yet, and that corporate insiders are still selling and usually begin buying again before a market correction ends.
Or you might look at technical charts and conclude the market is short-term oversold and due for at least a short-term rally that could get something going on the upside and leave the correction behind.
However, you could also look at convincing research that seems to say you don’t have to guess how long to stay away, don’t have to suffer headaches trying to fathom what cold winds blowing around the globe from Europe and China, or disappointing jobs or retail sales reports might do to the economic recoveries, and therefore to stock markets.
For instance, there is the mountain of evidence that supports the annual seasonal pattern from which the mantra ‘Sell in May and Go Away’ was born.
It says sell everything on May 1, and stay away until November 1, standing aside for the entire unfavorable period between, when history shows the market experiences most of its serious corrections and only in rare years experiences meaningful rallies.
Recognizing that the market does not top out into a correction on the same day in the spring every year, nor does it launch into a rally on the same day in the fall each year, in 1999 I introduced a similar strategy that has been one of the portfolios in my newsletter since. It is also based on the market’s annual seasonality, but utilizes a technical ‘momentum reversal’ indicator to better identify the best entry and exit dates each year. Its simple rules over the last 11 years resulted in a gain of 124% compared to a gain of 6.6% for the S&P 500 over what has become known to investors as ‘the lost decade’, in which two bear markets have devastated portfolios. Meanwhile the worst annual decline of the seasonal investor in those 11 years was 4.2%.
So, the market’s annual seasonal pattern says stay away until the October/November time-frame, take only 50% of market risk, and yet outperform the market, and therefore most professional money managers and mutual funds by a wide margin over the long-term (and the long-term is all that counts in investing).
Another consistent historical pattern may also be of assistance in this second year of the current Four-Year Presidential Cycle.
Since at least 1918, the stock market has experienced a substantial rally from the low in the 2nd year of every presidential administration to the high in the following year. That rally has averaged a gain of 50% for the Dow.
A study published in 2005 by Dr. Marshall D. Nickles of Pepperdine University showed that for the period from 1942 to 2004, if an investor bought the S&P 500 index on October 31 in the 2nd year of each presidential term, and held until December 31 of the following election year, he would not have lost money in any of those periods of being in the market, and would have gained a total of 7,170% (not counting interest on cash when out of the market).
He compared that to an investor being invested only in the opposite periods, who would have had losses in six of the 13 periods, the largest of which was 36%. And rather than see a 7,170% gain over the period, would have seen his original investment shrink by 35%.
I have a similar strategy based on the Four-Year Presidential Cycle that can have an entry as early as August 15 in the 2nd year of the cycle. (And we also have a non-seasonal Market-Timing Strategy, that will also help us identify when the bottom is in, and which takes also downside positions for profits in market declines).
So there you have proven seasonal strategies that say the odds are the low for the year will not be seen until at least August, but more likely not until the October/November time-frame.
Of course that does not preclude rallies in the meantime that fail at lower highs on the way down to the probable low later in the year. And you could also bet against the odds and, like playing a roulette wheel, might win occasionally and think you have something that will work long-term.
But now you know why I have been saying that the February low was probably not the market low for the year, and short-term rallies notwithstanding the low is still probably several months away, and is likely to be significantly lower.
