Monday, April 30, 2012

Stock Markets: Don`t Sell In May And Go Away

These days you could very often read the slogan: "Sell in May and go away ". I reckon this would be a huge mistake. There are at least 6 arguments against selling automatically in a certain calendar month:

1. The stock market  is far too complex to follow any rules. In the long run it trails the economic trend, in the short run stock prices respond to a flood of economic news which is often random. Usually corrections occur when the stock market has to respond to disappointing news and/or to revise previous price gains which went too far. Selling before a correction starts is a nice idea, but in reality many people sell too early and come back too late because nobody can predict the timing and the length of a setback.

2. History doesn`t repeat itself. The followers of the "sell in May rule" refer to the last year, when the stock market peaked on April 29th and to 2010, when it peaked on April 23rd. But both corrections started just coincidently in the months of April because the global economy temporarily crossed in both cases  some of the weak spots which are part of any long run economic upswing. These weak spots and the following reacceleration can occur any time. They don`t depend on seasonal facts.

3.The slogan could be self-defeating. If many follow and  sell in May their disposals would set the stock market under pressure and stocks would become cheaper. In this case  the rule followers would create a buying opportunity. When the rule followers come back to the market - say by the autumn - they would raise the stock prices. Following stubbornly the "sell in May rule" would therefore implement to sell cheap and to buy expensive.

4. I reckon that stock market is undervalued because the majority of market participants are still pessimistic and underinvested. Maybe some already sold in April to pre-empt the expected selling in May, which would (partly) explain the weak stock market in the early weeks of April.

5. The earning seasons for Q1 20012 proves that company profits are rising even in a sluggish economy thanks to the rising efficiency of the corporations. The climbing earnings should fuel further stock price gains in the coming months.

6. The U.S. economy is still on recovery track fueled by rising consumer spending. I also reckon that speculators who are now betting on a crash of the Chinese economy and a worsening of the European crisis will be disappointed and have to come back.

Thanks to climbing company profits and the healing of the global economy the S&P 500 could reach 1.700 points by end of the year. In this case the sellers of May could miss stock market gains of 20% or more this year.

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