You’ve probably heard the adage “sell in May and go away.” It’s a nice little rhyme, and it does have a basis in the market’s seasonal patterns. Over time, the stock market as a whole has typically been weaker from May to October than it has from November through April. Going back to 1950, the Dow is just about flat May to October but up over 7% on average from November to April.
On the other hand, that’s certainly not the pattern every year, and bailing out of stocks altogether for such a long period of time is tricky. For one thing, you have to figure out the right time to get back in. And this year in particular, there’s another historical trend at work that muddies the waters: the Presidential election. Going back to 1950, the S&P 500 has moved higher in the last seven months of Presidential election years 13 out of 15 times, according to Stock Trader’s Almanac.
Also important, first-quarter earnings-reporting season, which lingers into May, has been solid so far, with nearly three-quarters of companies beating expectations. In addition, housing, which was the biggest cause of our economic problems, looks close to bottoming out, European debt contagion risks remain largely contained at the moment, and anemic interest rates are supportive of demand for stocks — many of which pay higher dividend yields than CDs, savings accounts and bonds.
My strategy is simple: I like to make sure I’m properly diversified and that my portfolio is in balance with my desired allocations. I also make sure the stocks I own are the strongest opportunities with specific catalysts in place to drive the stocks higher.
That said, “sell in May” isn’t a bad way to go for stocks you’re not sure about. As an example, let me share a few of the stocks on a list I just put together for subscribers to my GameChangers advisory service.
Many of these stocks have shrinking margins, bleak revenue outlooks, face increased competition and could be affected by a cautious consumer as well. At best, I expect them to be dead money for a long time; at worst, they could drag your portfolio down.