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Partial Truth Of 3 Market Maxims

Cinthia Murphy

Much like the seasons, market maxims come back year after year, offering clues as to what investors can expect to see in the months ahead.

The reality is that no maxim is right all the time. Consider these three popular pieces of wisdom circulated among market participants every year:

  • Sell in May and go away

This maxim centers on the idea that stock market performance falters during the summer months, and doesn’t pick up again until late September, early October. Historical seasonal trends fuel this adage, coupled with the fact that market action tends to be more volatile during summer vacation season.

But, as an investor, if you followed this maxim in recent years, you may have missed out on stock gains more often than not. In fact, in four of the past seven years—more than 50% of the time—stocks gained in the five-month period between the beginning of May and the end of September.

The most notable of those years was 2009, when the SPDR S&P 500 (SPY | A-97) rallied more than 22% in that time period, as the chart below shows. Had you sold in May 2009, you’d be paying a lot more for a share of SPY to get back in in the following autumn.

It could be that the point of this adage is more to warn investors about increased risk than it is to suggest market direction. If you disregard the impressive 2009 summer run-up, and look only at SPY’s performance in the May-September period from 2010 to 2015, you will see that summer downturns were far more dramatic than the summer rallies.

The most SPY has gained in the five-month period ended Sept. 30 in the past six years was 6.3%. That was in 2013.

The fund’s worst summer loss came in 2011, when SPY plunged 16% in five months—that’s a decline four times as steep as SPY’s best summer in recent years.

  • As January goes, so goes the year

In recent years, this maxim has proven more wrong than right. In fact, in five of the past seven years, what happened in January stayed in January. For example:

  1. January 2009: SPY dropped 8.2%. The ETF ended the year with gains of 26.3%.

  2. January 2010: SPY dropped 3.6%. The ETF ended the year with gains of 15%.

  3. January 2011: Things started out looking better; SPY saw returns of 2.3%. But that upward momentum stalled, and the fund lost ground, closing 2011 with gains of only 1.8%.

  4. January 2014: SPY dropped 3.5%. The ETF ended the year with gains of 13.4%.

  5. January 2015: SPY dropped 2.9%. The ETF ended the year with gains of 1.23%.

  • The trend is your friend

This is a most reassuring market adage. If you want to make money, simply follow the trend.

But trend-following can be tricky business, even if there’s evidence it can work well long term. You first have to find the trend, and catch that wave, if you will.

Then, you have to figure out when the trend is changing. Because trends end.

There are many ways to establish and identify a trend. And there are ETFs that offer trend-following in an easy-to-use approach. One such fund is the Pacer Trendpilot 750 ETF (PTLC), which came to market last year.

The idea behind PTLC is simple: Follow the trend higher. The fund is designed to offer exposure to equities when the trend is positive—as determined by the price of the index relative to its 200-day moving average—and moving into U.S. Treasury bills when the trend has changed. The basic idea is: Own the market when it’s rising, and trim that exposure when things get bumpy.

But year-to-date, if the fund has managed to avoid much of the S&P 500’s downside, it has done little to catch much of the upside, as the chart below shows:

Charts courtesy of StockCharts.com

These market adages are anecdotally interesting. And they may or may not offer insight on short-term market moves in any given year. But to long-term passive investors, who make asset allocation decisions based on long-term goals, they are nothing more than short-term market noise.

Contact Cinthia Murphy at cmurphy@etf.com.

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