As you'll no doubt know, I'm bearish on stock markets – certainly in the developed world – just now. And of course, I'm a long-term bull on gold.
But just as there are tradeable patterns in the gold market which can provide good entry points, or short-term trading opportunities, so there are similar seasonal patterns in the stock market.
One of the best known is summed up in the City saying: "Sell in May, go away, come back on St Leger's Day."
Well, the 230-year-old St Leger's Festival took place last week. Does that mean now is a good time to get back into the stock market?
Does 'selling in May' really pay off?
'Sell in May, go away, come back on St Leger's Day' is one of those strategies that when it works, works really well. According to research by website ADVFN, between 1984 and 2004, the strategy would have returned 55% more than a simple buy-and-hold strategy.
And a detailed study by economist Ben Jacobsen of Massey University concluded: "We find this inherited wisdom to be true in 36 of the 37 developed and emerging markets studied in our sample. The 'Sell in May' effect tends to be particularly strong in European countries and is robust over time. Sample evidence, for instance, shows that in the UK the effect has been noticeable since 1964".
But, like any trading strategy, it doesn't always work. For example, returning to the market at St Leger's Day in September 2008 would have been one of the worst trades in history. You would have been going long straight into the crash. Indeed, October seems to be the month of choice for stock market crashes (just look at what happened in 1929, 1987, 1997, 1998 and most recently 2008). It's a dangerous month to be long.
As for selling in May, look what would have happened if you'd done that last year (see chart below). At first, you were looking good. But if you didn't buy back in June, you missed one of the greatest stock market rallies in living memory.
Forget St Leger's Day – buy back in at Halloween
As 'Sell in May' is a seasonal trading strategy, it makes sense to look at some seasonal charts. (All courtesy of Dimitri Speck at www.seasonalcharts.com). The first shows the seasonal patterns of the FTSE 100 in the 23 years to 2007. According to this data, early June is in fact the time to sell and late October the time to buy back in:
So perhaps the proverb should really read: "Sell in May and don't be seen, 'til trick or treat and Halloween."
Will the pattern hold this year?
I must say, so far this year looks like it's going to fit the pattern. In fact, the sell came a few days early, with 26 April marking the high for the year so far.
As far as coming back into the market goes, I'd say it would be reckless to buy in just after we've had a 10% rally. The pattern of this year so far has been one of violent swings from one side to the other. So the short-term likelihood must be for a swing back the other way – i.e. down. This is reinforced by the fact that 1,125 on the S&P 500, which we have just touched, is an obvious resistance point.
As you'll probably remember, I've been advising cash as the best way to play out this volatility, as these swings are so very hard to trade. Indeed even the hedge fund 'geniuses' are performing badly. Hennessee Group says the Eurekahedge index has just had its fourth-worst first-half ever, while the Absolute Return sector (so named as it is supposed to perform in all market environments) has returned just 0.1%.
This record period for 90%-up and 90%-down days (which are when 90% of stocks move in the same direction) is also rather ominous. The last time we saw such activity was in the lead up to the crash of autumn 2008. In fact, it's been more extreme this time around.
So I can't find much reason to be going long stocks at present. And I can find plenty of reasons to sell, be they seasonal, cyclical, technical, or fundamental. But if we get a nice swing down from here, then mid-to-late October might mark a nice tradeable low at which to buy stocks with a view to holding through to, well, next May. We shall see.
From The Money Week published on September 17, 2010