Battle of Stock Market’s May Cliche Pits Citigroup Versus S&P

May 01, 2014 11:10 am ET

(For more Market Insights columns, see NI MKTINSIGHT <GO>)

May 1 (Bloomberg) -- If you like your investment strategies boiled down into a nice, easy-to-remember rhyming couplet, you can’t do much better than the old “sell in May and go away” cliche.

The time-worn adage crops up as reliably as crabgrass every year around this time, much to the delight of stock-market strategists at Wall Street banks looking for topics to strategize about. (Not to mention stock-market columnists with daily deadlines.)

The month itself isn’t so terrible. The S&P 500 has averaged a 0.1 percent gain in May since 1950, which only makes it the fifth-worst month of the year, according to the Stock Trader’s Almanac. In fact, it was the best month for the S&P 500 from 1985 through 1997. The problem is the month marks the beginning of a traditionally weak period of the year.

The Almanac breaks down a hypothetical investment of $10,000 in the Dow Jones Industrial Average placed on May 1 and cashed in on October 31. If you started with that strategy in 1950 and repeated it every year since, you’d be down a hypothetical $1,105. It would’ve made a lot more sense to buy that last sweet woody station wagon made by Dodge for less than three grand and drive away to someplace nice.

S&P Capital IQ strategist Sam Stovall chalks up the phenomenon to “reduced capital inflows, vacations, late-year earnings reality, and mutual funds’ fiscal year-end window dressing,” according to an April 28 report.

Midterms

The weakness can be even more severe in mid-term election years like this, according to Stovall, with the S&P 500 recording an average decline of 0.8 percent since 1991. Adding to the drama this year, he points out that the S&P 500 has risen for nearly 31 months without a decline of 10 percent or more, versus the average of 18 months since 1945.

By contrast, the average total return for the Barclays Aggregate Bond Index has been 4.8 percent during the May-October period during mid-term election years since 1991, according to Stovall. If you insist on staying in stocks, he points out that consumer staples and health-care shares tend to rally during the May-October weakness.

There is only one thing that could counter a cliche as powerful as “sell in May and go away,” and that’s another, perhaps even more-widely used, cliche that is also great for those adverse to rhymes in their portfolios: “this time could be different.”

Rhyme, Reason

That’s the call from strategist Tobias Levkovich at Citigroup Inc. in a report on April 17. He argues that a strengthening economy overwhelms even the best rhyming iambs the market has to offer.

“All indications,” according to Levkovich, point to stronger growth in gross domestic product and earnings in the months ahead. The signals include credit conditions, hiring intentions and capital spending plans, he wrote.

Regardless of who’s right, it’s undeniable that seasonal rhymes like this are just too much fun to ignore and the market could use a few more of them. So here are a few more freshly made-up rhymes for your consideration:

• “Always remember to buy in November.” This is the ying to the sell-in-May yang. Remember that $10,000 in 1950? It would have been worth $765,055 by 2013 if you sold at the end of April each year, according to the Almanac.

Wack Nasdaq

• “If you don’t think January is time to buy Nasdaq, you are wack.” Best month by far for the Nasdaq Composite Index with an average 3 percent gain since 1971, twice the S&P 500’s advance, according to the Almanac.

• “Buy at the end of July, and you’ll be feeling high.” If you followed this strategy last year with some of the market’s best-performing shares, marijuana stocks, and got out at the end of February before the meltdown in momentum, you’d be looking at an almost 2,000 percent rally in Advanced Cannabis Solutions Inc. and almost 800 percent in Hemp Inc. Granted, most of the weed stocks haven’t been around long enough to test seasonal trends. And there may have been better months to enter them, though it’s hard to imagine a better rhyme. Also, properly researching this strategy is only legal in two states so far. Other risks include forgetting your E*Trade password when it comes time to sell.