Today, I’m going to talk about the merits of one of the market’s oldest adages: Sell in May and Go Away. But I’m going to start off with a quick update on the money flow topic I wrote about two weeks ago, especially given the market’s wobbles since then.
During the past two weeks, we’ve seen a big $15.1 billion flow out of domestic equity funds/ETFs, while $23 billion flowed into bond funds/ETFs—a difference of $31 billion in the past two weeks alone! And since the year began, there’s been $94 billion more money moving into bonds than domestic equities.
None of this means the market can’t fall further in the short- or even intermediate-term, but I still believe this sort of sentiment data reinforces the view that there’s still lots of nervousness among investors, which usually results in higher prices over time.
Sell In May and Go Away
Now, back to Sell in May and Go Away. The theory is that just about all of the market’s gains over time come from November 1 through April 30—“the best six months of the year,” as adherents call it. Conversely, owning stocks from May 1 through October 31 (“worst six months”) is when most of the major declines occur.
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And you know what? Over time, that is exactly correct. Since 1950, the market has made no net progress from May 1 through October 31! All of the market’s net gains during the past 66 years have come during “the best six months of the year.”
However, despite that track record, I still have a big issue with the Sell in May and Go Away strategy, or at least, how the financial media portrays it.
The problem with selling in May is that it usually isn’t a good move. That’s right—40 of the 67 “worst six-month” periods (60% of them) have shown gains! That means, for long stretches of time, owning stocks from May 1 through October 31 has been a good thing. For instance, since the 2008 debacle, the so-called worst six months of the year has produced a total gain of 23.4%—an average of nearly 3% per year over eight years. Not bad.
However, it is true that when the market does have big down moves (like during bear markets), they generally occur during the summer or fall.
Thus, what we really see during the May 1 to October 31 is uneven performance—sometimes it’s good, lots of times it’s decent, and a few times it’s really bad (10 of the 67 years saw double-digit declines). But to believe that most summers and falls produce market turmoil is simply not true.
What I think the headlines should emphasize isn’t selling and going into hibernation starting in May, but instead, putting more money to work in late October, and riding what is a very consistent and bullish history during the best six months.
During the past 67 years, 53 of the best six-month periods have shown gains (79%). Moreover, history has shown that big gains most often occur from November 1 through April 30, with 27 double-digit gains and just three double-digit declines.
My overall point is that most investors misinterpret this indicator. The fact is that the “worst six months” beginning in May usually produce gains, and sometimes big ones.
On the flip side, the “best six months” have a far more reliable (and, of course, bullish) track record, with the market notching gains in the vast majority of November-April periods.
Bottom line: If you’re going to make moves based on the Sell in May and Go Away indicator, it should be to buy in late October, not to sell in early May.
Really, though, if you remember one thing from my column today, remember this: If making money was as easy as adjusting your portfolio based on the calendar, then we’d all be rich. But unfortunately, that’s not how the market works.
Instead of making dramatic moves based on the month of the year, you’re better off using some time-tested market timing indicators like those in Cabot Growth Investor, which have kept subscribers out of devastating declines and in for major bull markets for more than four decades! Click here to join.
What My Market Timing Indicators Are Saying
So what are those timing indicators saying today? Longer-term, they remain encouraging—whether it’s the clearly positive longer-term trend, or the relative health of the broad market (very few stocks are hitting 52-week lows) or some long-term studies (including something we call our 7.5% Rule), the odds strongly favor the next big move being up.
There’s no question, though, that the intermediate-term uptrend is under duress—the indexes topped out more than six weeks ago, small- and mid-cap stocks haven’t made any net progress in months and some key sectors (like financial stocks and, last week, chip stocks) have fallen by the wayside.
Right now, then, I’m holding my resilient stocks, but I’m also limiting most new buying to small positions. And I’m focusing on stocks that not only are performing well, but also appear to be early in their overall runs.
You won’t find something as early in its run as Bioverativ (BIVV), which just started trading in early February. Still, it’s got a steady growth story and could be a favorite of institutional investors. Here’s what I wrote about it in Cabot Top Ten Trader a few days ago:
“Bioverative was spun off from Biogen early this year with two commercial hemophilia treatments, Eloctate and Alprolix. The duo have been growing consistently, with 2016 revenue up 58% over 2015. There is more room for market expansion with these two drugs and analysts have penciled in 18% revenue growth in 2017 and another 12% in 2018. Given that Bioverativ is currently profitable and that EPS growth should hover around 20% annually over the next couple of years, this looks like a relatively low risk biotech stock. However, its long-term potential isn’t solely about just Eloctate and Alprolix; it needs success in its pipeline to add more significant revenue to the mix. And it’s not likely that new products will hit the market until 2021 given that the two most advanced treatments are still in preclinical trials. On the other hand, this is a company that could easily be a takeover target within a few years and the potential for an overnight jump is likely to keep investor interest high. Another significant stock catalyst could be corporate tax reform given the degree of profitability here. Risks include competitor products, potentially from Novo Nordisk and Bayer.”
While the risks are there, the fact is that that BIVV is trading at around 20 times earnings and should have a long runway of steady growth ahead. And the stock reflects that, pushing to new highs earlier this month despite the weak market, and then pulling back only modestly in recent days. I’m not against nibbling around here and then seeing how earnings (due May 3) are received.
P.S. If you’re on Twitter, give me a follow @MikeCintolo. I usually Tweet out few tidbits each day on what I’m seeing in the market and individual stocks, including the occasional set-up. It’s free, so follow along!”
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