The Return of the Slogan Months

Today is May 1, or May Day, depending upon which circles you run in. For investors, the first day of May ushers in what I call the “slogan months.” This period is when you hear a loud chorus of market wizards warning investors to “sell in May and go away.”

 

Interestingly, this market cliché actually does have some historical merit. You see, in a majority of years, the real money in stocks is made between November and April. From May to October, there’s a lot of profit taking, slow trading and a traditional investor malaise throughout the summer months.

 

According to investment research firm FundExpert.co.uk, selling in May outperformed the “buy and hold” approach to the markets in each of the last three years. The relationship held in all but the most defensive sectors. So, what does this recent track record mean for the markets now, particularly in the context of the big run in stocks from November 2012 through the present? I suspect that if stocks fail to hold their gains in May, we could be staring down the barrel of a protracted six-month slide in equities.

 

I think it’s actually ironic that the S&P 500 finished April at an all-time high, since it indicates to me that there is a much greater chance of the “slogan months” taking a real toll on what I believe is an extremely overbought market. The chart below of the S&P 500 shows just how far domestic stocks have run, particularly since falling below their long-term moving average in November 2012.

 

 

So, are we going to see a sell in May and go away situation this year?

 

Well, that scenario has played out in each of the past three years, and I think there’s a very good chance that we’ll see the same thing again this year. And while we don’t know how this is going to play out for certain yet, what we do know is that stocks have continued to ignore tepid earnings and lukewarm global economic fundamentals all year.

 

But just how long can this defiance of reality continue?

 

Interestingly, one reason why stocks have been so resilient to any sustained downtrend this year is due to central banks around the world actually buying equities. A recent survey of 60 central bankers this month by Central Banking Publications and Royal Bank of Scotland Group showed that 23% of respondents indicated that their respective central banks own shares or plan to buy them.

 

The Bank of Japan, holder of the world’s second-largest capital reserves, announced that it would more than double investments in equity exchange-traded funds to 3.5 trillion yen ($35.2 billion) by 2014. Moreover, the Bank of Israel bought stocks for the first time last year, while the Swiss National Bank and the Czech National Bank have increased their equity holdings to at least 10% of reserves.

 

This trend is likely to keep a bid in on stocks, and that’s definitely going to be a tailwind that helps equity prices. However, nothing can trump sluggish fundamentals of the kind we’re seeing in Europe, China and here at home.

 

Indeed, today’s completely expected decision by the Federal Reserve to leave interest rates untouched at near zero, and to continue its massive $85 billion per month bond buying scheme known as quantitative easing, speaks to the fact that the Fed also sees a weak U.S. economy, and an even weaker U.S. jobs market, going forward.

 

We’ll find out what the April jobs numbers reveal when the data is released on Friday, but don’t expect any kind of major upside surprise that would cause the Fed to back off the monetary gas pedal.

 

All of this information builds a case in favor of historical norms, at least those of the past several years. That situation means that we are likely to see investors sell in May and go away.