May 2, 2017
Sell in May and Go... No Way!
The Investment View from Prescott, Arizona
Traditional stock market wisdom says to sell stocks in May and go away as stock markets often weaken during the summer. Popular lore attributes this seasonal trend to the large numbers of Wall Street traders who go to their summer homes in the Hamptons and are not very active in the market during warmer months. Not so.
There is clearly a phenomenon that shows the markets are stronger in winter than in summer for the majority of years. What drives this trend, however, is money flowing out of the stock markets during warmer months as more people buy homes during the summer. And the house money usually comes out of financial assets.
Should you sell in May and go away this year? I don’t think so. Nothing works all the time investment-wise, including this seasonal money flow into and out of the stock market. I think this is a year when the summer doldrums won’t show up.
The 4-year presidential cycle pattern in the stock markets has been calling for weak stock markets this year, but according to many, we have a different sort of president this time around. We have certainly been getting different market action than what the usual presidential cycle calls for.
Further suggesting that this summer may be different, several long term market indicators are pointing to stronger markets, all at the same time. Each of these indicators uses different data sets and different methodologies making this confluence of indicators seem more valid.
Should you sell in May and go away? I think you might miss a great party if you do.
What the Markets Are Doing
The stock market, after a red hot February, drifted lower from March 1- April 20, when it finally broke out to the upside in a meaningful way. Even the small company stock index which had posted losses for the YTD through April 13th bounced nicely which is a welcome positive indicator for the markets.
My friend Tom McClellan, of McClellan Oscillator fame, uses the analogy of a brood sow to illustrate how liquidity is the mother’s milk of the financial markets. The biggest, strongest piggies (large company stocks) get all the milk they want (money) before any of the runts (small company stocks) can get a turn at the teat. The runts thrive when milk is plentiful, but are the first to starve when it runs dry. In the same way, small company stocks thrive when liquidity is plentiful, and can crash when liquidity dries up.
Small company stocks leading this current rally is a good omen.
Bond markets are breathing a sigh of relief now that European economic indicators are looking better than they have in many years. All segments of the bond markets are showing modest gains for the year, with leaders being high yield (junk) bonds and Emerging Market bonds.
Gold has finally turned down this past week after a nice run so far this year. Often gold prices and inflation go hand in hand, but the Treasury Inflation Protected Securities (TIP), bonds designed to go up in inflationary times, have the smallest gain of all major bond segments, and actually have a negative interest rate despite gold’s strength. Go figure!
What's Going on in Your Portfolio?
Our Shock Absorber Growth* portfolios, although in positive territory for the YTD through this writing on April 30th, have not participated in the big stock market gains so far this year. The reason being the decisions that I made at the beginning of the year to stay defensive by holding cash and hedges rather than being fully exposed to the stock market and associated risks. In retrospect, this was the wrong move.
Although this move cost us some opportunity, as I often say, “I would rather lose opportunity than money”.
The decisions behind this move were based upon an overall strategy that has served us well over the years, avoiding almost all of the big market declines while trying to catch a good part, but not all of, market rallies. This combination, of investing for both bull and bear markets, creates a well founded conservative approach to growth investing. But even it doesn’t work in all markets.
This year, the markets climbed the proverbial Wall of Worry, and in February when I realized I should change from capital preservation mode to pursuing growth, the stock market was nearing the end of a short but red hot run. Buying in at a market top merely compounds problems like this, so I waited.
Beginning March 1st, the market declined steadily until late April and I invested very little during this period. Although this decline turned out to be a small one, I have learned to treat all small declines with respect because all big declines begin as small ones and you can't tell the difference in the beginning.
Using the quality of trend analysis that I have developed over the past year or so, I have recently bought a dozen new stocks, mostly for my Future Technologies* strategy which is part of the Shock Absorber Growth* portfolios. That group of stocks has averaged a 5.83% gain during their first week in your accounts. With gains like that, I am confident that your investments are going in the right direction and are taking minimal risk in doing so.
Flexible Income* portfolios have been held back recently by the under-performance of the Long Short Government Bond* (LS Bonds) strategy that is one of the underlying strategies. LS Bonds* is a trend following strategy and it produced extraordinary returns for us in 2015 and 2016 when interest rate markets were in clear trends. Since December, interest rates have chopped up and down producing a sideways and trendless pattern. In this trendless market LS Bonds* struggles.
Consequently, I have reduced our reliance on LS Bonds* from 50% of Flexible Income* holdings in 2016 to about 10% currently. I treat strategies like I do individual investments. When they are working well I feed them, and when they stop working I cut them back. It’s a little like tending a garden. When LS Bonds* starts rocking again (technical term) I will move more money into it.
Our Spotlight Strategy - Flexible Income
With our Shock Absorber Growth Strategy we strive to provide an acceptable rate of capital appreciation while experiencing less than one half of the risk of the S&P 500 Stock Index*, using primarily equity investments.
Your money will be invested primarily in stocks and commodity mutual funds and ETFs, foreign and domestic, inverse and leveraged, or cash. The proprietary HCM Safety Net suite of indicators is designed to warn of potentially sudden declines in which case stock market exposure may be quickly reduced.
Click here to read moreabout Shock Absorber Growth.