Small Cap Strategist is published by Crystal Equity Research an independent research resource on small capitalization stocks. Follow along as we discuss the most recent trends in the small-cap sector, investigate interesting companies and pan a few not-so-promising stocks.
Every few years I write a post about the stock market adage “sell in May and
go away.”This is one of the so-called
calendar effects in which it is possible to realize higher gains by selling
stocks in May and buying back into the stock market in November each year.I have followed this rule more or less for years,
as I realize that the seasonal cycle of school, sports and vacation impacts the
attention of finance professionals as well as individual investors.No one wants to worry about a significant new
position in a stock while packing up the kids and the dog for an extended stay
at the beach.Compound that thinking
among thousands and it is not hard to see the impact on trading volumes and
therefore on asset prices.
Yet for some
investors this year it might seem tough to give up stock market positions that
they have worked so hard to reestablish after the stock market rout we experienced just
a few short years ago.
Forthe reluctant, I will mention a nuance that I have added to this practice of shedding
long positions in anticipation of tepid equity results in the during summer and
early fall months.While not mentioned
frequently among technical analysts, I use a technical indicator called the
Commodity Channel Index (CCI) to find the best selling point in May and then
the best reentry points in November.
Commodity Channel Index was developed by a smart guy named Donald Lambert back in
the early 1980s when new computing power began making it possible for
individuals to inexpensively analyze large amounts of data.Donald was after cyclical trends in
commodities.However, I find that the
way the index measures the current price level relative to an average price
works just fine for equity securities as well.Without going into the intricacies of the CCI calculation, the index can
show unusual strength or weakness and serve as a great bull or bear case
the CCI may not be enough as I have observed occasions when the CCI signaled a
stock was oversold (the CCI is under 100) only to find the stock continued to drop to
even lower levels.Likewise I have seen
the CCI signal an overbought stock (the CCI is over 100) that just seemed to
keep on going higher.To help eliminate
these ‘premature’ signals to buy (the stock is oversold) or sell (the stock is
overbought), I check another technical indicator called the MACD (Moving
Average Convergence Divergence) line.I
have found that continued divergence signals the trend is not finished and it
is likely that whatever signal the CCI is providing is about to become even
month I will be looking for opportunities to sell when stocks are overbought as
indicated by the CCI and have run out of steam according to the MACD.Next November I will be back in the stock market
again, looking for oversold conditions.
you at the beach!
Neither the author
of the Small
Cap Strategist web log, Crystal Equity
Research nor its affiliates have a beneficial interest in the companies