I’ll just go ahead and cut to the chase. “Sell in May” is real and I’m doing it.
In fact, plenty of people have been selling like crazy long before now, but we’ll get to that shortly.
Now, I’m not going to feed you poorly veiled cheerleading for a bearish cause or analysis of soft data.
Go ahead and search for “sell in May” and you’ll find plenty of blowhards either championing their blind adherence to bullish or bearish behavior, or using the concept to mock the other side of the debate.
I’ll let them try to shout louder than each other while we stick to the cold hard facts for this one.
“Past performance does not indicate future returns” is the universal rule in investing, but there are decades of evidence that the trope of selling in May is legitimate.
Pair it with some disturbing trends in the market, and there is incredibly strong evidence that you will need to be very selective about where you keep your money for the next six months.
“Sell in May” Is Legit
There is a subset of financial wonks that adamantly believe there is some perfect mix of obscure indicators that will let them front run the market. They’re digging for some root cause to the chaos and froth, not just something that lines up pretty well as an indicator most of the time.
More reasonable folks will categorically reject most of these ideas, and they should.
However, some do correlate pretty well with data from previous years. While “sell in May” is ballyhooed, it is right far more often than wrong.
Ben Jacobsen, a finance professor in New Zealand, studied all available historical evidence from 108 different stock markets around the world. His statistical tests detected the seasonal pattern in the United Kingdom as far back as 1694.
Jacobsen even managed to find a Financial Times article dating to 1935 that refers to the “sell in May” pattern and implied that it was well-established with market watchers, investors, and financiers.
For any single year, it is not a great indicator. Some years show bigger losses or abnormal gains.
In 2012, the S&P 500 posted a 0.6% gain between May and the end of October. The index rose 11.5% through the whole year.
Out of the roughly 32% gain in the S&P 500 last year, about 11.5% came from May to October. The returns from the rest of the year were a bit under twice as much, in spite of coming from just half the year.
Over a 50 year timespan, the cycle averages out to a gain of 7.5% from November through April and a 0.1% loss from May through October.
Here is a look at how a single dollar would grow if it were invested in just one of the six-month blocks each year:
So there is “sell in May” in a nutshell. With enough time and data, the trend clearly exists and the time to bet on broad market gains is heavily skewed to late fall and winter.
Is this enough for us to blindly play along with the trend? Of course not.
In fact, for many of the years portrayed in the chart, there is no real reason to sell at all. You just couldn’t expect much of a payoff for having your wealth locked up in equities.
However, this year I’m going to be very careful. I am going to sell, but I’m not going to sit on the sidelines.
Markets are about fear, greed and asymmetry, not blind faith in a trend. It is the imbalance of information different kinds of traders have available to them and how could turn greed into fear that settles the issue for me going into summer.
Finding Greater Fools
There are a couple major factors that have me worried about betting on growth in the broader market through the end of the year.
First quarter GDP is being revised downward after overly optimistic estimates (big surprise). The U.S.A. appears to have posted a negative growth rate in the first quarter.
Projections and estimates put year-to-year earnings growth in flat or negative trends through 2014.
On the surface, we could just look at this as a consequence of last year’s massive bull rally. Cut a bit deeper and it looks far worse. Earnings are not what they should be, or even what they appear to be.
In a healthy economy, there are disincentives to boosting earnings per share without meaningful growth through capital investment. But easy money is pouring into corporate coffers through virtually free loans due to Fed policies. This is fueling outsized jumps in EPS growth that will fizzle out and can’t support long-term growth.
Companies are dedicating future cash flow to debt management to fund large buyback programs today. There is little incentive to pay off the debt with such low interest rates, but rolling the debt over exposes companies to higher rates in the future.
Ultimately, this reduces the capacity of corporations to pay for fixed capital investments and create meaningful growth down the road.
Corporations capitalized on the low interest rates by issuing $18.2 trillion of bonds worldwide since 2008. Currently outstanding corporate debt has risen over 50% to $9.6 trillion over the same period.
2013 was second only to 2007 for the total value of share buybacks. $500 billion, equivalent to about half of the money the Fed used to juice the economy, was used this way.
The “growth” this created in 2013 was largely a carefully engineered mirage. The stock market gains were not. This disconnect came from a persistent imbalance in the information possessed by different types of investors.
Institutional investors have the time and training — along with a huge incentive to keep their jobs in a cutthroat industry — to analyze the market and trade accordingly.
Bank of America Merrill Lynch provides data on the cumulative net buys of U.S. equities by its clients. Those institutional clients just sold the most since January and the 4th most on record.
Yet the markets surged up last year and has managed to stay flat so far this year. They’re selling to someone, and the gap between reasonable valuations and current share prices only makes an inevitable correction worse over time.
Who are the greater fools buying hope while the pros sell the hype? These charts will do the talking:
Finding Alternatives
So sell in May is real, tricks are being used to create the illusion of corporate growth, and the pros are gladly selling shares to the investors that are perpetually late to the game. The same ones that are perpetually burned at the end of a bull rally.
Add it all up and it is a strong case to shun equities in the summer investing doldrums.
However, you don’t have to sit on the sidelines. You just can’t count on blue chip stocks or the broader market to boost your wealth.
There are always ways to make money in the market. Three options stand out in particular:
Certain sectors fare better — The utilities, telecom services, information tech, consumer staples and health care sectors have outperformed the broader market from May to October between 60 to 80% of the time over the last several decades.
You can easily build a defensive portfolio that lacks long-term growth potential but features some nice dividends. Come November, shift to some momentum stocks if they’re attractively priced and start reevaluating your allocation going into the new year.
Find the exceptions to the norm — Pick and choose stocks with the potential for meaningful growth. Companies announce breakthroughs and new products as soon as possible, outside of broader market trends.
The Outsider Club editors are constantly searching for underappreciated trends and opportunities and we’ll send you what we find through our newsletter.
Make bonus money — Decades of nothing but “buy-and-hold forever” advice, coupled with intentional attempts to hide information on more profitable methods, have worked.
Many investors have no clue that they can easily add money to their portfolio with little risk.
In fact, a good friend of mine — Briton Ryle — recently showed his readers how to pull in a 20% gain in three months on a gold mining stock.
From a $4.60 per share entry price, he pulled in $1.05 a share in cash. Plus, he still owns the shares. In essence, he created his own unbeatable dividend.
He expects to duplicate this again over the next couple months. I’ll let him give you more information if you’re interested in how he does it.
