Friday, April 08, 2011

Go Away in May?

Another year has rolled around and we are again faced with the question of whether to remain in the equity market   -  in a meaningful way  -  or sell ahead of the May through October time period.  This is a period that has been documented as historically a slow growth period for equities, at least in comparison to the months from November through April.  This so-called calendar effect is among the best documented, with the most pronounced differences between the two periods found in the U.K. and European markets where the August vacation ritual continues to be widely practiced.  It is a matter of fewer traders being around during the summer months that leads to the slow down beginning in May.

I have written about this and other calendar effects several times.  This year I am paying real attention to the potential for equity doldrums in the May through October period.  Several of the stocks in the Crystal Reports coverage universe have been on the rise, exceeding our price targets.  Recently, we began taking profits in Sauer Danfoss (SHS:  NYSE) and TPC Group (TPCG:  Nasdaq).  Both are strong companies, but there respective stock prices may fully reflect that success.  We are also trimming in VirnetX, Inc. (VHC:  NYSE) despite our view that the company is at an early stage with its communications network security technology. 

Our concern is that these successful stocks may not be able to keep up the momentum if trading volumes dry up during the summer months.  During the dot.com bubble the May-October lull all but disappeared behind frothy trading volumes.  With the bubble gone it is possible to see the vacation effect again.

I would not suggest that investors leave the equity markets entirely.  However, I do think stocks that taking profits in stocks that have had a good run may be an astute move.  If I am correct that SHS, TPCG and VHC could falter under diminished trading volume there will be opportunities to rebuild positions next September.



Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.  Crystal Equity Research has a Sell rating on SHS, a Sell rating on TPCG and a Hold rating on VHC.

$SHS $TPCG $VHC

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