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The myth of 'sell in May and go away' Add to ...

The investment community once again is talking about “sell in May and go away.” The expression assumes that North American equity markets frequently move lower from May to September. However, the expression is a myth.

Frequency of gains for North American equity markets from the beginning of May to the end September is random to slightly positive. During the past 20 periods, the S&P 500 Index has gained in 12 periods and declined in eight periods. The TSX composite has gained in 13 periods and declined in seven periods. The main reason for random performance is a lack of annual recurring events that influence equity markets during this period.

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The “Sell in May and go away” myth has escalated in recent years because the largest losses in the year frequently occur during the May to September period. Notable was a loss during the 2008 period of 16.0 per cent by the S&P 500 Index and 15.3 per cent by the TSX composite index.



Frequency of stock market gains is higher during the October to April period. The S&P 500 Index has appreciated in 16 of the past 20 periods and the TSX composite index has gained in 15 of the past 20 periods. Frequency of gains is one measure of stock market performance. Net accumulation of gains is another measure.



History also shows that more than all of the accumulated gains by North American equity markets have occurred during the October to April period. Thackray’s 2012 Investor’s Guide noted that a $10,000 investment in the S&P 500 Index from Oct. 28 to May 5 since 1950 increased in value to $1,067,851. In contrast, a $10,000 investment from May 6 to Oct. 27 since 1950 declined in value to $6,862. A $10,000 investment in the TSX Composite Index from Oct. 28 to May 5 since 1977 increased in value to $200,778. In contrast, a $10,000 investment in the TSX Composite Index from May 6 to Oct. 27 since 1977 declined in value to $6,674. Therefore, the expression that explains the best period for accumulated gains in North American equity markets is “buy when it snows (near the end of October for most of North America) and sell when it goes (after the winter snow storms finally have passed)”.



Higher frequency of gains and better accumulated gains from October to April can be attributed to a series of positive annual recurring events. Many of these events are tax related including year-end transaction, contributions to tax sheltered accounts, etc. Important events impacting equity markets at this time of year include release of annual reports and the holding of annual meeting that frequently occur with the release of first quarter results. Chief executive officers often use this series of events to announce dividend increases, share buy backs and stock splits.



For every rule ... An exception exists during the April to September period. One important recurring event influences equity markets every four years, the U.S. Presidential election. During that year, North American equity markets have a history of moving lower after the end of April, building a base in June and July and moving higher into early September. By early September, equity markets usually are slightly higher than the end of April. In April, traders respond to a ramp up of political rhetoric between the two presidential candidates that raises questions about future economic policy.

See the Dow Jones Industrial Average seasonality chart

When equity markets are ready to predict the Presidential winner in July regardless of the candidate, equity markets recover, move higher into early September and record additional gains after the next President is elected. This year, political rhetoric between Obama and Romney already has started to ramp up. A word of caution! A tight race between now and September could preclude the traditional recovery in equity markets after the end of July.



North American equity markets entered into a corrective phase earlier than usual this Presidential election year. U.S. equity indices peaked on April 2 and have trended lower since then. Moreover, U.S. data released last week suggests that a recent growth spurt in the U.S. economy has stalled. In addition, investors frequently are responding to first quarter reports released by selling on news. Downside risk between now and July is significant.



Preferred strategy is to protect the value of your portfolio between now and July either by taking profits, by selling call options against existing positions with an expiry in July or by purchasing non-leveraged inverse equity index ETFs covering part of the value of your portfolio. Top inverse ETF choices for investors with U.S. equity investments are Short S&P 500 ProShares , Short Dow 30 ProShares . Top choices for equity investments in Canadian dollars are BetaPro, S&P/TSX 60 Inverse ETF and BetaPro S&P 500 Inverse ETF



Ironically, the Greater Toronto Area experienced its first major snow storm of the winter season on Monday. The snow will not last long. Remember: “Buy when it snows, sell when it goes”!

Don Vialoux is the author of free daily reports on equity markets, sectors, commodities and Exchange Traded Funds. . Daily reports are available at http://www.timingthemarket.ca/. He is also a research analyst for Horizons Investment Management Inc. All of the views expressed herein are his personal views although they may be reflected in positions or transactions in the various client portfolios managed by Horizons Investment Management.

 
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