It’s the most familiar couplet ever uttered on Wall Street and, by this point of the year, the most overused: “Sell in May and go away.”
The reason this has become such a clichéd pearl of purported wisdom is that there’s a grain of truth within. That, and it’s catchier than, “Historically, most stock-market appreciation has occurred from November through April, and while it doesn’t work every year, and May through October is not down on average since 1928, its average gain is weak and those months have featured a greater incidence of nasty declines.”
Of course, the fact that the simplistic sell-in-May approach has worked pretty well the past three years – and that the Standard & Poor’s 500 index rose six straight months by more than 13% since Oct. 31 to a new high – has only heightened awareness of it.
The month of May alone in the past three years has brought S&P 500 losses between 1.9% and 7.9%, and in each case ushered in a stretch of choppier market action and further declines into mid-summer.
An urgent application
Naturally, just when the attention on a market pattern is most urgently applied is the time to ask whether it has become too widely anticipated to follow the assumed script. Such long-time seasonal rhythms are more like climate than weather: They tell us about the long-term tendencies but don’t tell anyone how to dress tomorrow. And banking on a rerun of another sell-off to start on cue might prove like, say, betting on a fourth straight white Christmas in Cincinnati.
Any market sitting on an 18% gain in five-and-a-half months should be considered at risk for at least some flattening out or downside retrenchment, of course, no matter the month – especially if the economic numbers continue softening as they have.
That said, not much about where the stock indexes sit is inconsistent with the way the corporate-bond market is now valued, or how supportive central banks are sure to remain. The equity market acts a bit more like one determined to stretch to an outright overvalued state several percentage points higher than one peaking out for good. Ryan Detrick of Schaefer’s Investment Research notes that the Dow industrials have been up in each of the first four months of a year 12 times prior to this year. The average gain for the rest of the year was nearly 7%, and the remaining nine months were down only three times – none more than 5.5%.
In any case, most investors don’t toggle between all-in and all-out of stocks and cash based on phases of the moon. For them, the recent rally provides an opportunity to figure what to sell – and buy – in May and beyond, given the stark separation between leading and lagging market segments.
Market beneath the index surface
Interestingly, the market beneath the index surface has been undergoing the kind of shift, especially since mid-March, that is typical of a post-April tape. More “defensive” sectors such as utilities, telecom and consumer-goods shares have been lifted along with the lust for cash yields. Cyclical companies geared to global production momentum have been left behind.
Those in love with blue-chip dividend stocks dotting the typical “Grandma portfolio” should be happy to earn the dividend alone for a while. The Powershares S&P 500 Low Volatility ETF (SPLV) owns many such names, and has beaten the broad market by a wide 4 percentage-point margin so far this year. The stocks are still expensive based on earnings, and this week’s 4.4% one-day drop in Pfizer Inc. (PFE) shares following subpar earnings shows such “safe” stocks still hold risk when at such elevated prices.
Other stocks with similarly strong balance sheets and attractive dividend yields that have not run up as much and look promising include Old Tech names such as Intel Corp. (INTC), Microsoft Corp. (MSFT), Corning Inc. (GLW) and CA Inc. (CA).
Elsewhere in consumer staples, Coca-Cola Inc. (KO) and Johnson & Johnson (JNJ) started the year having moved in lockstep the prior 20 months. Since December, J&J has lifted off, climbing 30% more than Coke shares. Coke, with a comparable dividend yield, appears the more attractive choice for fresh money now.
Large biotech stocks Biogen Idec Inc. (BIIB) and Gilead Sciences Inc. (GILD) are each up 38% to 50% this year, and are among the most “overbought” big stocks in the market, say B of A Merrill Lynch analysts, making it hard to see how they can maintain that pace.
While the housing recovery has gotten outsized attention, the auto comeback is farther along and has miles to go, based on pent-up demand. Ford Motor Co. (F) and battery maker Johnson Controls Inc. (JCI) shares remain reasonably valued plays on this trend, offering more exposure to any economic pickup globally.