The weather is getting warmer, the days longer, and the US equity market looks like it is ready for a nap. Yup, summer is here.
The S&P 500 has broken its intermediate term trend. Plus numerous technical signals have been confirming the break. Traders seem to be worried about how Congress will deal with the debt ceiling and what effect it will have on the global market place – this is in addition to Greece’s debt problems and poor economic numbers here in the US.
Our ARTAIS Model has been steadily moving into cash. The model has been holding almost 60% cash for the past few weeks. I would expect to a short term bounce in the stock markets as it is in over-sold territory – after which traders will most likely head for the beach.
Meanwhile, the bond market has clearly benefited the past few weeks from these trends:
I came across a great article written by John Mauldin on the “Sell in May and Go Away” seasonal trend”. Very interesting, especially when you take a look at how the trend performs in cyclical bear markets. Enjoy:
Sell in May and Go Away
May 1, 2009
By John Mauldin
The old adage that one should â€œsell in May and walk awayâ€ has been around for years. I mentioned that bromide about this time last year, urging readers to head for the sidelines if they had not already done so. I was also suggesting a strategic retreat in August of 2006 (after which the markets went up 20% before plummeting). In this weekâ€™s letter we look at the actual data and offer up a fresh viewpoint. Then we turn our eyes to the recent GDP numbers, which were awful, though many took comfort in the apparent rise in consumer spending. Are Americans back to their old ways? It will make for an interesting letter.
Sell in May and Go Away?
My friend and South African business partner Prieur du Plessis recently updated a chart on monthly stock market returns since 1950. It clearly shows that the November through April periods have on average been superior to the May through October half of the year. (To read his very interesting blog you can go to http://www.investmentpostcards.com/)
And the difference is quite significant. As Prieur notes, the â€œgoodâ€ six-month period shows an average return of 7.9%, while the â€œbadâ€ six-month period only shows a return of 2.5%. Of course, selling creates taxable events, which can hurt your returns.
Plus, you never know when the markets are going to go down and when they will be up. There can be a lot of variance from year to year. For instance, in 2007 the markets were up during the summer by 4.52% and down during the â€œgoodâ€ period by -9.62%, which is opposite the average pattern. Of course, the markets did go down by 30% after May 1 last year and down another 5% since then. That is what bears markets can do.
Which caused me to wonder. The last 59 years have seen two significant secular bull markets (roughly 1950-1966 and 1982-1999) and two secular bear markets (1966-1982 and 2000-??? â€” the one we are in now). I wondered if the pattern changed during the bear cycles, so I shot a late-night note off to Prieur and came in the next morning and had my answer.
It made a significant difference. May through October in secular bear cycles has been ugly. Look at this graph:
And just for fun, letâ€™s look at the monthly numbers since the present secular bear market began in 2000. So far, this has been a lot worse than the 1966-82 cycle, although we have not yet had the recovery phase from the current doldrums, which will likely make the overall numbers look better in 4-5 years.