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Sell In May And Go Away: Keep Or Ditch?
Perspective | 17 May 2013
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By: Louis Kent Lee
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By: Choo Hao Xiang
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It is that time of the year again. The investment strategy of “sell in May and go away” has many pondering over the preciseness of the advice, in particular, for the next six months. Right now, the month of May has seen a bullish trend across the globe. Led by the groundbreaking US market, regional markets began the dreaded month with much vigor. The question then arises, should you sit tight or bail on your equity holdings?

Market timing counts as one of the crucial factors in determining investment returns. Now, you will probably be thinking, “There’s no way I can fully master that!” But what if the seasonal pattern has already been pointed out? Would you still follow through?

Given that May is currently underway, one cycle, which is likely to garner interest, is the “sell in May and go away” strategy. The theory warns investors to stay out of the equities market in the May to October period as performance will pale in comparison with the November to April period.

Performance Of The STI And US Indices For The Past Two Years

We came away with two noteworthy points following an examination of the relevance of the theory to the Singapore market. Firstly, the strategy held water for the past two years, not only for the US market but Singapore as well. The second point, which is even more interesting, is that during the years under review, the Straits Times Index (STI) came off its highs in April.

As we dabble into mid-May, we are still seeing the three indices mentioned above making stellar returns. In fact, the STI has recently clocked its multi-year high as it bulldozed past 3,400 alongside the all-time high seen in the Dow Jones Industrial Average (DJIA) as it crossed 15,000, and fresh new highs seen in the Standard & Poor’s 500 Index (S&P 500) barely a fortnight ago.

Performance Of STI For The Past Two Years

So, with all these highs made, does that mean that the “sell in May” theory seen in the past two cycles is something we can brush away completely this year? We wouldn’t agree with that so readily.

Divergence Alert
If one were to look at the current STI chart, it is quite apparent that our local bourse is pumping upwards in quite a rampant way. This also brings across the thing that everyone has been harping about lately, “is this movement for real?” For better clarity on the strength of such movement, we have pulled in specific economic and technical indicators to see if such movement is in any way supported by underlying fundamentals.

STI Returns Versus GDP Growth

Source: FactSet

If you took a look at the STI Returns Versus GDP Growth chart, you would’ve realised that while we are constantly seeing new highs made, a strikingly disturbing divergence has also been seen, when such movement is decked against our Gross Domestic Product. This alarming similarity is also highlighted in the combined chart of DJIA and the S&P 500, where such divergence is seen between the two indices and the indicators such as the “Conference board leading indicator (red)” and the “relative strength index (RSI) (dark orange)”.

Source: FactSet

In both charts, the underlying economic indicators are both showing an obvious declining movement. This suggests that the strength of these economies are not the source fuelling such rally we are seeing from the indices.

Also, we have to remember that despite not seeing any official quantitative easing (QE) from the US for this year, other forms of QE like Japan’s renewed stand on weakening its currency and the QE launched by the European Central Bank are currently at play, and this is perhaps the main steroids feeding this rampant upwards pump in the indices. In terms of technical talk, the divergence seen between the DJIA and S&P 500 with the RSI also suggests a possible change in price direction moving forward.

Stocks Weathering The Cycle
On the lighter side of things, we also took a look at a list of stocks, which covers component stocks of the STI, to see how they have weathered the “sell in May” seasons for the past two cycles. As you can see, the stocks are split between two categories, where category one details companies that engage in businesses that are generally cyclical, and category two shows a list of stocks which are primarily defensive in nature.

Performance Of STI Components The Past Two Years

Presented in the table above is a clear distinction. Sorted according to how they fared in the previous May to October period, it can be seen that the average returns of those companies grouped under category two were superior during both “sell in May” seasons. Surprisingly, this was also the case for the November to April periods.

In addition, if one were to take a look at the amount of damage sustained by the two categories during the 2011 cycle of the May to October period, one would’ve noticed that the average loss shed by category two was almost less than half of the average returns borne by category one. Regardless of the seasonality impacts, it does seem like defensive stocks are in vogue currently. This is viewed in-line with the divergence explained earlier and the uncertainties plaguing the global economic outlook as investors take shelter in traditionally more resilient stocks.

Perhaps we’ll see a continuation of the current trend, perhaps we’ll see equity valuations continuing to disprove fundamentals, but we have to remember, that we are only less than a month into the May to October cycle, and there’s plenty of room for normalisation, or unexpected shifts to happen. Therefore in conclusion, you could be pin-point accurate about this revolutionary rally, or that we will not see a third time’s a charm on this “sell in May” theory this time round, but whether or not such uptrend is meaningful, only time will tell.

This is a co-written article of Shares Investment, which lays out the analytical ideas and thoughts of the authors, who are well versed in investments and market concepts.

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Join The Conversation
The Shares Investment editorial team welcomes constructive feedback on our coverage and content. We would also be delighted to answer any questions on the above article. Leave us a comment below, and we'll get back to you shortly!

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