May 13, 2014
Sell in May and Go Away: A Jacksonian Fallacy
The Investment View From Prescott, Arizona
Now it looks like the old stock market adage “Sell in May and Go Away” may not be true this year despite how well it rhymes.
Sell in May and Go Away refers to the tendency for the stock market to do better in the winter than in the summer. Many studies have shown that this is true, just not every year.
Some years are totally backward, like 2008-9 when the winter was one of the worst that stock market investors had ever seen, and the summer was one of the best. Go figure.
Some segments of the markets are not affected by this seasonality nor are some regions, so blindly selling all stocks on May 1st doesn’t work too well.
This seasonal tendency is due to money flows into and out of the stock markets. “Follow the money,” as the old saying goes.
In the Fall, factories begin gearing up for Christmas, more workers get hired, more truck drivers are needed to deliver things and more clerks are needed to sell the goods. All of this economic activity gets money moving in the economy and some of that money starts finding its way into the financial markets.
Around year end there are mutual fund distributions, profit sharing payments and tax refunds, all events that put money into consumer’s hands, some of which finds its way into the financial markets.
In the Spring, the money that flowed into the stock markets ebb and begin to flow the other way. Folks that did not get tax refunds earlier now get to write big checks to the government.
The largest influence on this money flow is home sales. 
It is common knowledge that more people buy homes in the summer than the winter, so where do you think that house money comes from? It comes from stocks, bonds, mutual funds and savings. Money flows out of the financial markets into real estate during summer.
So Sell in May and Go Away is based upon observable money flows. Until recently I expected this summer to be a bummer, but I am not so sure now.
Part of my earlier reasoning is that after the strong last year we are due for a correction in the stock market. But corrections can happen two ways. Sharp downturns get the headlines but long sideways markets allow the excesses of a strong market to be worked out and the number of potential buyers to be replenished, putting the market back in equilibrium.
As of this writing on May 10th, the S&P 500 Index** is right about where it was a couple of months ago. The longer this sideways trend continues, the less likely we are to see the kind of crash everyone is worried about.
In addition to the seasonal cycle just mentioned, there is also a 4-year cycle based upon the presidential elections. This is the second year in the cycle, a year which has a reputation for producing sharp stock market declines, another source of worry for investors.
However, my friend Tom McClellan who writes the McClellan Market Report, has done a study isolating the cycle of second term presidents in which the second year is not so scary. The further we get into year two of this presidential cycle without a crash, the less likely we are to have one.
So while there are some troubling indicators flashing caution signs, there are others showing promise.
The late Marty Zweig said “Never fight the [ticker] tape,” meaning the trend of the market, and the trend is refusing to turn down. Those who think the market is wrong and they are right often get expensive lessons.
Zweig also said “Don’t fight the Fed,” and while everyone focuses on the Federal Reserve reducing the cash they are injecting into the economy to stimulate it, the fact remains that they are still adding cash to the tune of $45 billion a month. And other central banks are doing the same. This alone is enough to keep the market afloat for a while longer, maybe right on through the summer.
And while some indicators have weakened over the past few months, trendless markets like we have right now reduce the reliability of indicators. Don’t bet the farm based upon scary news. This is a prime time for investors to be misled.
The fact is that the market is doing OK.
True, it is being held up primarily by defensive segments like utilities, energy and consumer staples. If these hold-outs begin to break down, the likelihood of a serious decline increases greatly.
Right now it’s May, but I would not sell and go away quite yet.
A Slice of Life
Twenty-five years ago the minister of my church asked me to serve on the board of Trustees. It was a fairly young church, and my entrepreneurial skills were well used as we crafted bylaws and a balanced budget for the first time.
One of the last things I did as president of that board was to hire a new minister who has served the church well for the past 23 years. However, now that minister is retiring.
A few weeks ago the church asked me to come back again to serve on the board and see them through the transition of hiring a replacement for our long-time minister. This time around, the church has an experienced board, a stable membership and generally runs like a well-oiled machine.
I’m flattered to be asked to help in the ministerial search process. I’m glad I like adventures, because this type of endeavor sure has the potential for some.
How’s the Market Doing?
The S&P 500 Index** stalled out again last week, just shy of its all time high level of 1890, posted April 2, 2014.
Normally high prices are good, but when a price gets close to old levels and then runs into a wave of selling that sends prices back down, like the S&P 500 Index** has done 3 times in the past month, that tells us there is buyer resistance at that level.
Moreover there has recently been a crazy number of mid-day reversals in price. The S&P 500** has shown 9 mid-day change of directions in the past 12 days as of this writing on May 10th.
Many stocks are in downtrends, but the market as a whole is doing OK. The upside standouts are the defensive issues such as energy, consumer staples and utilities. If they begin to break down, that will signal trouble for the broader market.
Despite the Fed reducing the QE stimulus that has held interest rates near record low levels, the yield on 10-Year Treasury bonds has been more stable than any year since 1978, according to Cantor Fitzgerald.
This movement to defensive stocks and dividend payers is a flight to safety this makes sense with the weakness in growth, specifically small companies and Nasdaq stocks.
Could this be smart money moving out of a market getting ready to roll over? Or are these investors reacting to the Fed cut-backs and moving out of the stock market prior to a collapse that so many say will surely happen?
This brings to mind two things. First, when everyone thinks something is sure to happen, it rarely happens as expected. If everyone thinks the market just has to collapse, it probably won’t.
The other thing is a quote from William Hamilton, an early editor of the Wall Street Journal, who said, “The grave yards of Wall Street are filled with men who were right too soon.”
The market will go down eventually, but I would wait to see further evidence that it is actually happening now before taking action.
What’s Going On In Your Portfolio?
In my last newsletter, published on April 15th, I reported that accounts following our Shock Absorber Growth* model held 50% in cash. Since then additional holdings have been sold as the strength of our holdings waned.
Cash and proceeds of sales have been put to work protecting the growth portfolios from a general market decline.
Current holdings include utility and diversified stock funds along with three individual stocks. These holdings are paired with inverse investments, ones that go up as the market goes down to protect our account values if the market declines.
Should the stock market break upward out of its sideways trading range, I will quickly reduce the inverse holdings to get in sync with the possible new uptrend.
The Flexible Income* model is fully invested and holds diversified income, high yield, and floating rate bond funds along with a new addition, an emerging market bond fund.
Municipal Income* accounts are fully invested and performing well.
What We Were Saying Back Then
Not A Good Time To Invest In Gold
I have commented on the gold market frequently over the past few years as I moved in and out of it. Currently all of my managed accounts are out of gold and have been for several months.
Gold has been going sideways for several months, making many of my normal indicators for gold less effective.
Looking further out, there is a normal 13½ month cycle low for gold, ideally due in July. The charts make it look like gold is likely to break below the December low of $1,187 per ounce whenever the next downtrend comes along in the next few months.
Since the December low is almost $100 below the May 9th closing price of $1,290, save yourself $100 or more per ounce by holding off on gold purchases. Gold could be bottoming now, but the probabilities suggest it will break down, not up, out of its current sideways pattern.
Mental Floss
Wow – look closely. This is actually a person!
This parrot is in fact a female model who posed for ‘world body painting champion’ Johannes Stötter.
The Italian artist spent weeks planning the transformation, taking four hours to paint his subject with ink.
The model’s arm forms the parrot’s head and beak, and her legs form the wing and tail feathers.
Scottsdale Office Date
Will is happy to meet with you in Scottsdale if that is preferable to Prescott. Please call the office to schedule your appointment. 928-778-4000
College Classes Coming
Fundamentals of Investing for Retirees
This is the class I began teaching 25 years ago at Yavapai College which has proven itself to be one of the most popular investment classes YC has ever offered. It will be held again from 1:00 – 3:00 p.m. on three consecutive Thursdays beginning June 5th.
This easy-to-grasp format is designed to help investors become more confident about their financial decisions. Learn the ins and outs of stocks, bonds, mutual funds, annuities and more. Topics include recognizing risk, controlling the tax impact of IRA withdrawals, avoiding common investment mistakes and simple risk reducing strategies that anyone can use.
Contact the College at 717-7755 to register. The cost is $65, payable to Yavapai College.
Changes Coming To Our Newsletter
To allow more timely posting of articles over the next month, we will be transitioning to a blog format where each article will be posted the same day as it is written. Currently we operate under a two-day delay to allow Sheri and Yvette to do the terrific formatting you see here.
You will be able to choose the time when articles will be sent to you – immediately as each article is posted, or a weekly/monthly digest of articles.
We will be replacing the regular sending of this newsletter with a monthly listing of all articles posted during the previous month with links to each article so that you can click on the link to read the full article, or skip it as you choose. We hope this new format will allow information to be delivered to you in a more timely manner.
And it will move our communications with you to a 21st century technology. It’s hard to believe that this beautiful newsletter we craft for you is an outmoded format – “so 2010” as the kids would say.
Have You Received A Statement This Quarter?
For all of our investment management clients, we have arranged for independent custodians to send you account statements at least quarterly, even if there is no activity in your accounts.
Bernie Madoff made off with billions because he was allowed to produce his own phony statements. Our independently produced statements, mailed directly from the custodian, are for your protection.
If you have not received a statement this quarter, please call the office so we can correct that situation for you.
Our Spotlight Strategy
With our Flexible Income Strategy we strive to provide high total return consistent with Capital Preservation.
Your money will be invested in bond mutual funds and exchange traded funds (ETFs), including inverse and leveraged funds, currency funds, including precious metals that may be used as currencies and equity – income investments whose price trend is up.
If the price cycles down, holdings are replaced with new investments that are going up, repeating as needed. Growth stocks are not used.
If you would like a current copy of our SEC Form ADV, Part 2, or our Privacy Policy, they are on our website at www.hepburncapital.com/PR/form-adv.pdf and www.hepburncapital.com/images/PrivacyPolicy.pdf respectively.
* The model accounts mentioned in this article are hypothetical examples of how the strategy may work as designed. Performance and activity in client accounts may be different from that in the model in amount of each investment, specific timing of trades, and actual security used, which may vary from account to account. Not all trades are profitable. It should not be assumed that current or future holdings will be profitable. A list of all trades in these accounts for the past 12 months will be provided upon written request.
** Indexes are unmanaged lists of stocks considered representative of a broad stock market segment. Investors cannot invest directly in an Index.
Flexible Income
Adaptive Balance
Adaptive Growth
Shock Absorber Growth
This newsletter may contain forward-looking statements, including, but not limited to, statements as to future events that involve various risks and uncertainties. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual events or results to differ materially from those that were forecasted. Information in this newsletter may be derived from sources deemed to be reliable, however we cannot guarantee its accuracy. Please discuss any legal or tax matters with your advisors in those areas. Neither the information presented nor any opinions expressed herein constitute a solicitation for the purchase or sale of any security.
Copyright (C) 2014 William T. Hepburn. All rights reserved.
