Wall Street advised the majority of its clients that buying quality stocks and mutual funds and holding for the long term was the most effective strategy for investing. After all “no one can time the market.” Interestingly they touted this mantra while they were developing strategies that measured hold periods in seconds.
That data is now mainstream and carries the moniker “Sell in May and Go Away.” It was my most effective tool in getting people to understand the cycles and rhythms of the market and how they might be used to their advantage.
We found the data in the annually updated book “The Stock Trader’s Almanac” (if you are even mildly interested in the stock market we would recommend you get a recent copy). What author Yale Hirsch discovered in 1986 is that the stock market had a Jekyll and Hyde relationship with the calendar. Starting on May 1, 1950 investing $10,000 in the Dow Industrials through the end of October and then leaving the funds on the sidelines till the end of April and repeating the process through 2009 produced a disappointing $474 loss in your original investment. Conversely a similar strategy used to invest funds from November 1st through April 30th produced a gain of over $500,000. This is usually where an audience member said “Wait a minute...What?”
The information gets more dramatic when a well known internal indicator MACD (Moving Average Convergence Divergence) is employed. Mr. Hirsch used MACD in a simple fashion, no subjectivity, and the end result is significantly more significant. The losses in the summer-fall months grow to over 65% of the portfolio’s original value. The winter-spring months tack on another $945,000 in profits. With numbers like these it is difficult to not consider the seasonal/cyclical nature of the stock and financial markets.
The rationale for this disparity is as wide as the two outcomes are; empty trading seats during summer vacations (certainly the case in Europe), end of year bonuses finding their way into stocks, New Year resolutions bring an optimistic and bold outlook, IRA contributions (for the last twenty years) through the spring find their way into stocks, among others. All these are anecdotal as there is no real empirical evidence we could find regarding this phenomena.
Obviously this week begins the seasonally challenged period for stocks. Certainly the recent winter-spring period adhered to this dynamic producing a near 1700 point advance in the Dow Industrials, a better than 15% gain. What is somewhat eerie is the similarity in look the charts of the major indices have to last year at this time. The Dow peaked the last week of April around 11,200 and corrected 1500 points through early July. Many point the finger at QE1 ending which caused that correction. By the end of October the market had retrieved all of its summer losses. With the end of QE2 in sight, June 30th, will investors anticipate another swoon?
Being skeptical and/or cautious about this market has created a lost opportunity for many sideline sitters as money market funds have not shown a pulse in a couple of years. There is a saying on Wall Street “What everybody knows is not worth knowing” and some think it applies to data points such as this. As we mentioned earlier few weeks ago the financial channels started bringing up this dynamic as well as several talking heads. Our thought is that it is just another piece of information to put into the decision making process with other indicators. This two + year rally has been persistent like we have never seen before. Material data points such as the tragedy in Japan, the S&P downgrade of US debt, and Europe’s own debt issues have provided merely speed bumps for this galloping bull.
It is generally believed the financially healthiest entity, US public companies, cast the most influence over stock prices in the long term. With nearly three quarters of S&P 500 companies having their first quarter earnings in the books, about 70% of them have beaten earnings and revenue estimates. But then again the first quarter GDP number was a disappointing 1.8%, maybe suggesting the massive stimulus injected by policymakers may be starting to wane and the economy could start to lose it mojo. It is difficult to imagine that the extended period cheap money (low interest rates and QE) has been in play and the free falling dollar will not have some form of negative unintended consequence eventually.
Did You Know
Fed Facts and Treasury Tidbits - The USA’s current $14.3 trillion “total debt” is made up of 2 separate components. First, $9.7 trillion of outstanding Treasury securities, known as the “public debt,” i.e., the money we owe to our nation’s creditors. Second, an additional $4.6 trillion of funds from Social Security and Medicare that have been invested in Treasury securities, known as “intergovernmental debt.” US debt has been rated AAA by S&P every year since 1941, a span of 70 years. Since the rating agency introduced a long-term credit outlook measurement in 1991, the US has received a “stable” outlook. That streak ended 2 weeks ago today (4/18/11) when S&P reduced the USA’s outlook to “negative,” making us the only AAA-rating country in the world (out of 19) with a “negative” outlook (source: S&P & Treasury Dept.).
Final Thought
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