Tuesday, May 26, 2015

Last Week to Sell

Adherents to the market maxim ‘Sell in May and Go Away’ have one last week to take profits and otherwise shed equity holdings.  Culling a portfolio is sometimes an emotionally charged action as even the most steely-eyed trader develops attachments to some companies and their management teams.  For those investors who questions the practice of reducing equity holdings during the period beginning May through September, consider the historic data.

Since 1950, a yearly strategy of staying out of the U.S. equity market during June, July and August outperforms a strategy of remaining fully invested for a full twelve months.  A different analysis found that in the ten years ending 2013, the market was down 60% of the time between the beginning of May and the first trading day after Labor Day.  During that period over the ten years the market was either flat or slightly up only 30% of the time and experienced significant gains only 10% of the time.

The historic data has supported selling in May and a reduced equity exposure through at last the middle of September  -  at least until last year.  In 2014, investors who remained out of the U.S. equity market missed out on sizable gains during the summer months.  Is Summer 2015 going to be another barn-burner for equities?

I believe seasonal change is largely responsible for the May to September swoon in stock performance.  At least this is the case in markets located in the Northern hemisphere where school, sporting and vacation calendars are fixed by the summer season.  Investing activity slows all across the board as account holders and the professionals who serve them are preoccupied with summer camp and trips to the beach among other seasonal delights.  I do not expect that phenomenon to change any time soon.

What could have been unique about the summer 2014 period was the character if the bull market that has been running since about 2010.  The five-year chart for the Nasdaq Composite provides a clue.  After reaching a post-financial crisis high in early February 2014, the Nasdaq composite had retreated by 6.1% from that peak.  Then the report for job creation in April came out the first Friday in May 2015, giving investors new hope that the U.S. economy could recovery.  All through the summer months the job creation reports were dramatically higher than expected.  Layered over a potentially oversold condition, the job reports gave investors the excuse needed to bid U.S. equities higher.

The mix of conditions in 2015 seems different.  Memorial Day, which traditionally marks the beginning of summer in the U.S., is a week earlier this year.  Combined with stunningly beautiful weather in most places, the early start signals a long and busy holiday season.  There has been no recent retreat in stock prices to give investors a chance to get in the door at compelling values.  What is more job growth in 2015 has slowed compared to last year.

See you in 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.


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