As the calendar flips to a new month, everyone’s talking about seasonality and the “Sell in May and Go Away” phenomenon. We’ve had a good start to the year on Wall Street, and folks are understandably nervous about maintaining those gains. But should you be taking cash off the table, or looking to increase your bets?
Our roundtable of stock-market experts is here to help.
Read on for insights from Louis Navellier, Serge Berger, Jeff Reeves and more. From growth strategies and income plays to options and technical analysis, we’ve got you covered.
QE Trumps Seasonality
By Hilary Kramer, GameChangers
You’ve probably heard the old adage: “Sell in May and go away.” But this year? I don’t think so.
I’m sticking around for two main reasons. First off, much of the selling the past three years was caused by the European debt crisis, and while Europe’s debt problems haven’t gone away, they are being better managed. Second, there is a chance that we could see all three major central banks (the Federal Reserve, the Bank of Japan, and the European Central Bank) engage in quantitative easing at the same time (two of the three have already announced QE). Quantitative easing is arguably the single biggest factor behind the market’s run to all-time highs, and the fact that the three major central banks of the world could have it going at the same time makes things very different from the last three Mays.
Having said that, I do plan on staying away from gold and the high-end consumer discretionary sector. We don’t have to worry about inflation just yet — which is why people invest in gold in the first place — and the current gold bubble still hasn’t completely popped. As for the high-end sector, consumer confidence is still hurting, so customers are going to stay away from the expensive retailers and gravitate to stores where they can buy more for less.
In this kind of market, I will be focusing on stocks with solid and predictable earnings growth, strong catalysts and exceptional long-term opportunities.
A Technical Take
By Serge Berger, The Steady Trader
As we enter the month of May, the S&P 500 has rallied a stellar 12% year-to-date and a little over 14% since the important low in November 2012. Given the relentlessness of the rally in stocks, more than a few bears have likely lost their shirts as the improbable became reality.
Broadly speaking, understanding the current market structure is more important than technical analysis (which is best used for reference price levels). The market structure as I define it evolves around the market’s current focal point and driving force. For the time being, this focal point and driving force remains the global central banks, which continue to inflate equity prices and bring investors back into the markets.
This three-year experiment has resulted in similar patterns in the S&P 500, year after year. Namely, stocks rally sharply into April / early May, after which they correct anywhere from 10% to 20% over the ensuing months. While the duration of the correction varied in each year — lasting all the way into October back in 2011 — the “surefire” month to be expecting a pullback has been May.
But as Mark Twain said, history doesn’t often repeat itself (even if it does rhyme). We would be overly giddy to expect the same outcome again this May.
So are year-to-date gains enough to take some profits off the table in return for a little rest on the sidelines?
One potential scenario I could see play out is that the S&P 500 clears the critical 1600 area in coming days with a lift into the 1610-1620 area … before tricking out those looking to chase the index up to infinity and correcting by 5%-7%.
If May Signals a Seasonal Shift, This Condor Should Fly
The old “Sell in May…” saw has risen in popularity over the past few years — and for good reason. Since the dawn of our current bull market in early 2009, every major correction has occurred during what The Stock Trader’s Almanac calls the worst six months: May through October. The accompanying chart shades this seasonally weak period and identifies the largest drawdown experienced within that time frame each year.
How you incorporate seasonality into your investing depends in large part on your trading style. Let’s consider how the seasonally weak period might influence an option seller.
This year, selling monthly out-of-the-money bull put spreads on the SPDR S&P 500 (NYSE:SPY) has been a veritable profit-fest for those who have remained consistent in their put-selling ventures. And yet if recent history is any indication, the bull run experienced in Q1 is unlikely to be duplicated over the next two quarters. It’s altogether more likely that the market rises to a smaller degree, treads sideways, or perhaps experiences a minor correction.
In all three of these scenarios, an iron condor strategy will provide more profitable results than continuing to sell put spreads every month.
Here’s one to get you started: Sell a June condor by simultaneously selling a June 166-169 bear call spread and a June 150-147 bull put spread for 57 cents or better. The max reward is limited to the initial 57-cent credit and will be captured provided SPY remains between $166 and $150. The max risk is the distance between strikes minus the net credit, or $2.43.
Let’s Stay and Play
In my book The Little Book That Makes You Rich, I spend several pages discussing the “Sell in May and Go Away” phenomenon that has developed over the years. Adherents of this strategy believe that you should own stock from November to the end of April and then sell out and go to cash.
The funny thing is that is actually worked pretty well over the years, as the strategy mirrors the market’s return but is only invested half the time. This result has a lot to do with corporate and consumer spending habits as well as pension funding timing.
But I am not an advocate of using the approach. I prefer something I call “Don’t Go Away, Let’s Stay and Play.”
This May could well be another bumpy month as post-tax-day pension funding does begin to dry up, removing an important source of buying power from the market. The “sell in May” crowds will be active again this month. But instead of joining the sellers, I want you to look for the opportunity to buy the dip and use weakness to increase your holdings of the very best stocks.
The May swoon is well documented and discussed, but equally strong is substantial evidence that stocks begin to rise as we approach Memorial Day. By the end of the month, market participants will once again begin to focus on fundamentals in anticipation of earnings releases that will begin again in July.
I suggest you use Portfolio Grader to find the very best stocks to accumulate when we get a selloff in May as the seasonal investors flee the market. The rally is beginning to lose breadth as the market moves higher, and the serious money that powers stock price movements is engaging in a flight to quality right now. By focusing on stocks with the very best fundamentals and strong earnings growth, we can be positioned to benefit from their buying when it kicks in near the end of the month.
Stocks that have an “A” grade in Portfolio Grader for both fundamental and quantitative measures will receive an overall “A” grade — these triple-A stocks are what you should be buying when we get market weakness related to seasonal and economic factors over the next month. Rather than following the herd, let’s stay and play to make money off their mistakes with a focus on the very best stocks.
Look for Income in a Sideways Market
By Charles Sizemore, The Sizemore Investment Letter
The language of Wall Street is infused with pithy maxims. “Don’t frown; average down.” “The trend is your friend.” And perhaps most relevant to us at this time of year, “Sell in May; go away.”
The last one is perhaps the most dangerous because, at least for the past several years, it has held true. Since 2010, we’ve had strong first quarters followed by volatile, choppy springs and summers.
VIDEO: See Charles discuss “Sell in May” with InvestorPlace’s Jeff Reeves.
But it is important to not be fooled by randomness here or, more accurately, be swayed by the recency bias.
“Sell in May, go away” is a losing strategy if you are basing it on seasonality alone. In any given year, there could be legitimate reasons for selling in any particular month, but selling because it is a particular month is sloppy analysis that will lead to subpar results.
So, what about this year? After the great start we had, I’m not expecting much from the next quarter. And in fact, given that the market has traded sideways since mid-March, you could argue that we are currently in a mild correction.
But any weakness here should be used as an opportunity to put new funds to work. There is never an “ideal” time to invest, but I like to see valuations that are modest and sentiment that is lukewarm at best. Today, both of these conditions are in place.
I’ve recommended income investments such as dividend-paying stocks and master limited partnerships as the best way to generate returns in a sideways market. If you haven’t loaded up your portfolio with them yet, do so on any weakness. For “one-stop shops” I continue to like the Vanguard Dividend Appreciation ETF (NYSE:VIG) for dividend-paying stocks and the JP Morgan Alerian MLP ETN (NYSE:AMJ) for MLPs. I own both personally and in client accounts.
The Data Don’t Support an Exodus
By Daniel Wiener, The Independent Adviser for Vanguard Investors
“Sell in May and go away.” It’s a catchy phrase, and sometimes it’s even accurate. But the market-performance statistics on “Sell in May” aren’t all that compelling.
It’s true that there’s a higher chance of seeing a 20% market correction between May and September than between October and April. But that’s a correction, only. And I will get into inter-year declines in a second.
That 20% decline is the worst case. And there’s only a 14% chance we’ll see a 20% correction after May. (There’s a 6% chance of a 20% correction during the supposedly better period.) The notion behind “Sell in May” is that the market goes down in the May-to-September period and then goes up in the October-to-April period. Historically, however, the stock market has gone up between May and September, not down. It doesn’t go up as much, historically, but it does go up.
So, should we “Sell in May” because that’s a period that traditionally has generated an average return, annualized, of 9.5% vs. the average annualized return from October to April of 15.6%? I wouldn’t. And maybe that’s why more people aren’t doing it. If they were, then the market would sink ahead of May and “Sell in May” would become “Sell in April” and then “Sell in March” and so on.
Now, as to those inter-year corrections. Our research team looked back over 30 years to 1980, a time when inflation and interest rates were at record highs, and asked the question: “What kind of inter-year losses have investors had to contend with over this period?” The chart tells the tale.
Over the 33 full calendar years illustrated here, investors saw declines during the year of anywhere from 3% in 1995 to 49% in 2008. The average loss (inter-year) over these 33 years: 15%. And yet, on a total return basis — meaning the combination of the changing price of stocks with the addition of any dividends they paid — stocks were up in all but 6 of those 33 years, and the average return in any calendar year was 12.6%. That includes 1995, when stocks gained 37.6%, and 2008 when they lost 37.0%.
Sell in May? No thanks.
Plenty of Worries
By Jeff Reeves, Editor, InvestorPlace.com and The Slant
I place no credence in “Sell in May” superstition for superstition’s sake. But there are a host of concerns right now that lead me to expect a spring contraction in the markets. They include:
- Front-loaded returns: Traders are already up double digits after a great Q1. Why push it? Do we really think this could be a 20% or 30% up year? If not, then the risk-reward of buying stocks right now isn’t worth it. At best you sit on your hands; at worst you take cash off the table.
- Growth is stalling: Recent GDP numbers in the U.S. were a cause for concern. But it’s not just us. In Europe, Spain saw a contraction in Q1 and will be lucky to grow at all in 2013, and Germany’s forecast is for a mere 0.5% growth this year. Also, China’s GDP is slowing faster than expected. So much for a global recovery in 2013 … and so much for investor optimism.
- Weak top lines: The narrative of this earnings season is once again strong profits even as sales miss the mark. A few companies that posted a top-line miss and a bottom-line beat include shipper UPS (NYSE:UPS), telecom AT&T (NYSE:T), financial JPMorgan (NYSE:JPM), chemicals giant 3M (NYSE:MMM), tech giant Google (NASDAQ:GOOG) … and the list goes on. You can’t cut your way to bigger earnings forever.
There are other reasons, too, but these are my three biggies. I’m certainly not expecting a crash and burn, but I’m trimming some winners and keeping my powder dry for the inevitable contraction over this summer.