“Davidson” submits:
The term “Sell in May and go away” has its roots in the European markets of the 1800s when traders believed that business slowed during summer months as many took vacations. They justified selling the equity market lower from May till October. Economic demand normally picks up in the fall when people returned from vacation, i.e. for St Leger Day. Traders also take vacations!! Wikipedia has a short history which describes this effect: Wikipedia Halloween Indicator
The past couple of years we saw Greece, Italy and Portugal hit the headlines with their issues during the May-Oct period even though the news concerning these issues were well known throughout the year. Traders believed that these were potentially calamitous events and were only convince that they were not when business seemed to pick-up in the fall. Over the short term traders do influence markets and what they believe at the moment often effects market prices. Today the phrase has been in use as usual, but whether the markets find some short term reason to decline during the summer this time is unpredictable.
What I can say with assurance is that employment, auto sales, home sales and other measures of economic activity continue to climb within well-established trends regardless of the monthly volatility of single statistical reports. The Retail Sales data series from the FRED site of the St Louis Fed site is shown below. The link is: St Louis Fed Retail Sales One can see that there is a noticeable slowing of Retail Sales well before we run into recessions shown in GREY BARS in the chart.
Market declines even with world shaking events and false rumors like yesterday’s false AP report for which the Syrian government apparently took credit for hacking the site do not last very long as long as the fundamental economic trends are headed higher. This is why I do not recommend trying to time events such as “Sell in May….”. Typically, once one thinks you can time these events, they no longer sync with the market and one misses a substantial opportunity.
If we are able to roughly capture most of the large effect of the economic cycle on equity markets and avoid for the most part the correction which occurs as the economy cools, we should be pleased with the long term results.
I recommend ignoring the short-term trading advice thrown at us daily and stick to our business cycle focus till the evidence builds that we are entering economic maturity. Once we see this clearly, then we should plan on exiting the equity markets. Historically, economic maturity can be seen developing slowly over 12mos-24mos. It is fairly easy to see the flattening of Retail Sales 24mos+ prior to the last two recessions and market peaks. Economic trends are defined over many months S… L…O….W……L……Y!! Historically we have been able to see it coming!! I expect the current cycle to offer a similar warning.
I recommend ignoring the “Sell in May…” advice
