Sell In May And Go Away!

With many investors and advisors finding the current market conditions difficult to read, it is both instructive and interesting to determine recurrent themes and trends that manifest themselves every year.

Always remember, however, that unless you are an active trader or market speculator, financial investments should be made for the long haul with money that is not needed for other purposes.

Long has the adage “Sell in May and go away” lived in the minds of stock investors. Perhaps this has something to do with the summer vacation period in the northern hemisphere. It is easy to understand that investors prefer to be “less exposed” while on vacation, and it is logical to expect market weakness before the holiday period. What would you choose: Worry about your sun tan or worry about the market risk on your portfolio.

On a totally practical front, it is also obvious that market participants also require some cash – and pocket money – to take the family on vacation and we all know how expensive that is. So it is natural to expect some portfolio liquidation and weakness at this point.
Allow me a quick frivolous moment.

Other dangerous months are October. “October. This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February” – Mark Twain.

Now seriously : The 1929, 1987, 1988 and 2008 stock market crashes occurred in October.

And as we approach the year end markets will probably be more subdued with less volume and lower prices.

In America, a sell-off at the end of the year is also referred to as tax loss selling. This is the phenomenon of crystallising losses that have been incurred to offset capital gains. It is also a time of taking in profits, raising cash and insurance ahead of the holidays and generally tidying up portfolios. This combination of factors users in the January effect.

The January effect is the tendency for all stocks, particularly small capitalisation stocks, to perform very well on the first month of the year. A further adage is that if January goes well, the remainder of the year is likely to be a good one for the markets.

The reason for this is probably structural, and has to do with tax loss selling and institutional money manager behaviour.

Small stocks, generally grow at faster rates than larger companies do, and at the beginning of a new year this is where managers look for growth. It follows, therefore, that the additional demand for stocks, and small capitalisation stock in particular, leads to a period of relative out-performance.

To take this train of thought further, it is important to take into account that money managers are evaluated relative to some bench mark, such as the S & P 500 – the 500 largest companies in America or the JSE All Share Index.

Towards the end of the year, and having hopefully achieved a desired level of performance, there is a natural tendency to “lock in” profits made in small stocks, and to “bank” the profits before year-end by moving into large capitalisation stocks.

This would explain the relatively stronger performance of small stocks at the beginning of the year.

Whatever the reason, the fact is that small caps out-perform large caps in six out of seven years in January, and January is generally a good month for the markets.

Markets continue to enjoy an extended bull trend but some stocks still offer substantial value and incredible value when compared to bonds.