The Problem with Relying on Market Adages

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Believe Half of What You See and None of What You Hear!

I’ve always loved that old song, “Heard it Through the Grapevine”—especially Marvin Gaye’s version. And the headline phrase is very apt to today’s markets, I think. It reminds me that Wall Street is really good at shooting off its mouth, constantly trying to create and sell ‘systems’ guaranteed to beat the market, ‘never-fail’ technical indicators, time-tested market adages, and generally taking a bunch of data, trying to corral it into simple, black-and-white models that predict the market.

Doesn’t work. Oh, sure they all work sometimes, but as my dad used to say, “A stopped clock is right twice a day.” (I bet your dad said the same thing; it’s right up there with, “I walked two miles a day, barefoot, in the snow, to get to school!”)

Wall Street, over the years, has come up with scores of adages and advice to explain market gyrations, and they’ve done such a good job of convincing investors that they work more often than not, that investors frequently buy them, hook, line and sinker.

Now, don’t get me wrong—some are absolutely great advice—such as “Cut your losses short,” “Don’t fight the Fed,” and “Take windfall profits when you have them.”

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Sell in May, and Go Away” is one of the most popular. How many times have you heard that old Wall Street adage, as well as the following sayings?

  • Buy low, sell high
  • Bulls makes money, bears makes money, pigs get slaughtered
  • Do not buck the trend, your trade won’t be the one that turns the market around
  • Buy the rumor, sell the fact
  • Buy when there is blood in the street
  • No tree grows to the sky
  • The Santa Claus Rally
  • Wall Street is motivated primarily by emotions—fear and greed
  • The January Barometer, or as goes January, so goes the year
  • A rising tide raises all the ships
  • Time is the friend of stocks, the enemy of bonds

And often, they are correct. As I said, “Sell in May” is one of the most well-known market adages. Sam Stovall, Chief Investment Strategist for CFRA, says “Sell in May” has been right two out of every three years, since 1929.

In a recent publication, he reported, “The stock market registered the weakest six-month return from May through October (M-O), when the S&P 500 posted an average gain of only 1.4% since 1946, and the strongest from November through April (N-A), when it was up an average 6.7%. What’s more, the S&P 500 recorded a positive six-month return 77% of the time N-A, but only 64% of the time M-O. Finally, the market’s return in N-A outpaced the return in the subsequent M-O period in seven out of every 10 years.”

But Sam concludes with this, “Even though the average advance of 1.4% for the S&P 500 from M-O is the weakest of all 12 rolling six-month periods, it delivered an annualized return of nearly 3%. This is still better than what an investor would have received from a money market fund.”

And since the markets went higher in two out of every three years, you would have missed out on gains during the summer months that averaged 14.1% in 1997, 14.6% in 2003 and 18.7% in 2009.

More Market Adages

Another popular market adage is the January Barometer. Jeffrey Hirsch, editor of the renowned Stock Trader’s Almanac (and one of the contributors to my Wall Street’s Best newsletters), is also the son of Yale Hirsch, who created the term ‘January Barometer’ in 1972. His research dated the origin of that phenomena to 1934, after the Twentieth Amendment moved the date that new Congresses convene to the first week of January and Presidential inaugurations to January 20.

Jeffrey says that for 68 years, the track record is pretty amazing—an 86.8% accuracy rate, with only nine major errors—in the secular bear markets of 1966, 1968, 1982, 2001, 2003, 2009, 2010, 2014, and 2016. But there are exceptions, like 2009, when both the Dow Jones Industrial Average (DJIA) and the S&P 500 had terrible Januarys, losing 8.8% and 8.6%, respectively.

January 2019 was a very good market month, with the DJIA gaining more than 7%. And so far this year, we’re ahead by 11.2% on the broad average. So, so far, so good!

A couple of other market adages, “Do not buck the trend, your trade won’t be the one that turns the market around,” and “A rising tide raises all the ships,” are good rules to live by. They generally mean, you can’t fight momentum; if the market is really strong in one direction, you’ll probably lose your shirt if you make a contrarian bet. It’s hard to fight momentum.

The other market adages also make a lot of market sense, at one time or another. But the real moral of this story is easy: The market has cycles. And sometimes, they repeat themselves fairly well, compared to historical periods. Often times they don’t. And investors who blindly follow the crowd almost always get hurt, either by jumping into unworthy companies at their highest points (buying high) or staying on the sidelines when they shouldn’t.

The key is to forget about Wall Street. Think of them as the chief lemming leading all the rest of the lemmings over the cliff. Instead, our focus must be to realize that each market cycle is different than the one before. Our task is to carefully analyze the domestic, as well as global markets and economies, as a whole. Next, to break them down into what is working now and what is not, in terms of sectors. And finally, to find the very best potential investments in each of those ‘working’ sectors.

So, don’t waste your time jumping in and out of the market, based on dubious market timing claims. Instead, I recommend that you look beneath the surface, to discover what each market cycle can bring to the table—in terms of building your portfolio—instead of jumping off the cliff with the rest of the lemmings, and possibly missing some fabulous opportunities.

Nancy Zambell

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Nancy Zambell, Editor of Wall Street’s Best Investments, has spent 30 years helping investors navigate the minefields of the financial industry. Nancy scours more than 200 advisories and research reports to select the top recommendations, which she collects for you in this easy-to-read digest.

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