The old Wall Street adage suggests, “Sell in May and go away.” This saying encourages investors to sell their stocks on May 1, hold onto cash throughout the summer, and then re-enter the market on Halloween. While the rhyme is catchy, it may not lead to the best financial outcomes.
Mark Hulbert of the Hulbert Financial Digest cautions that waiting until May to sell could result in a wave of investors doing the same. This collective action might drive prices down. Rather than waiting, it might be wiser to consider selling as early as April. But how can one determine the right timing?
“Fortunately, we have practical data from two strategies that aimed to get ahead of the ‘sell in May and go away’ trend. The first comes from the ‘Almanac Investor Newsletter,’ edited by Jeffrey Hirsch, while the second is from Sy Harding’s ‘Street Smart Report.’
“Both utilize similar modifications to this seasonal strategy, relying on a technical indicator called MACD—short for moving average convergence divergence—to identify optimal entry and exit points. The Hulbert Financial Digest has tracked the effectiveness of both strategies since mid-2002, nearly 13 years ago.”
During this period, Hulbert analyzed the results and discovered that Sy Harding’s method yielded a 9.2 percent annualized return, while Hirsch’s method produced an 8 percent annualized return. Both of these outperformed the classic “sell in May and go away” strategy, which returned 7.9 percent. Meanwhile, a traditional buy-and-hold strategy would have resulted in an annualized return of 7.7 percent.
Running Out of Steam
The stock market’s volatile nature, evident from the DOW’s significant fluctuations earlier this week, may be a signal to sell sooner rather than later. Such erratic movements often indicate a market that could decline further rather than recover. Time will reveal the actual trajectory.
As for the U.S. economy, after a six-year recovery that has often felt sluggish, 2015 was anticipated to be a robust year. Falling gas prices and lower unemployment were expected to bolster consumer spending and elevate GDP growth above 4 percent.
However, GDP growth slowed to 2.2 percent in the final quarter of 2014. The initial GDP estimate for early 2015 won’t be released until April 29, but indicators suggest it could also be underwhelming.
Manufacturing is slowing, and consumer spending remains soft. The decline in oil prices may reflect overproduction but could also signify weakening demand. This trend extends beyond oil to base metals, which have seen sharp price declines.
For example, nickel is nearing a six-year low, and both aluminum and zinc are down. Whether these trends are mere coincidences or indicators of a stalling recovery remains to be seen.
The Best Time to Squirrel Away Some Nuts
The stock market remains erratic, and signs suggest that the economy might be slowing down. After more than six years of a bull market, we may be approaching a period of seasonal weakness—prompting thoughts of a market downturn.
What happens next? The economic challenges will not be masked by historically high stock prices. Similarly, policymakers will find it increasingly difficult to conceal the adverse effects of their interventions in the credit markets.
When economic conditions deteriorate, debts and investments made in anticipation of growth may become unmanageable. This often leads to rising unemployment and a surge in bankruptcies.
While the future remains uncertain, there may be another boost to GDP, or the economy could continue along its current path. However, given the prevailing conditions, the possibility of a significant market crash looms larger.
Thus, the ideal moment to stash away savings for tougher times is well before an economic storm hits. Now is certainly a prudent time to accumulate cash, whether in your bank account or tucked away securely at home. You’ll be thankful you did, especially when that cash provides the opportunity to capitalize on investment bargains after a market downturn.
Sincerely,
MN Gordon
for Economic Prism
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