The old saying “sell in May and go away” exists for good reason. May marks the beginning of a notoriously difficult 6 month period for the equity markets. The Stock Trader’s Almanac has some excellent historical evidence on May and the “worst six months”:
- “May/June disaster area” between 1965 and 1984 with S&P down 15 out of 20 Mays
- Between 1985 and 1997 May was the best month, with 13 straight gains, gaining 3.3% per year on average, up 7, down 5 since
- Worst six months of the year begin with May
- A $10,000 investment compounded to $527,388 for November to April in 60 years compared to a $474 loss for May to October
- Dow Memorial Day week record: up 12 years in a row (1984-1995), down seven of the last 14 years
- Since 1951 pre-presidential election year Mays rank poorly, #10 Dow & S&P and #8 NASDAQ.
The current market, however, isn’t your average historical market. We have an unprecedented environment in which the Fed continues to explicitly tell investors that speculation is a good thing. That makes it very difficult for an investor to take his/her chips off the table considering the fact that QE2 has two full months until expiration (with a strong probability of continued reinvestments, ie, QE-lite).
While no one can predict what May will bring, we can use the current environment to protect against the biggest threat of QE2. As I’ve previously discussed, that threat is the rising dollar. When the QE2 trade ends you’ll know it because the dollar will rally – particularly against the commodity and “risk on” currencies such as the Swiss Franc and Aussie Dollar.
So while May isn’t necessarily a time to sell it doesn’t mean it isn’t a time to hedge. And given the negative historical seasonal trends and the unpredictable environment due to the Bernanke Put, it might just be a good idea to consider hedges via some of the anti-QE2 trades in the currency markets. This way, you don’t have to rely on unpredictable seasonal and historical tendencies, but you can also ensure that you’re not merely floating in the wind should these historical trends actually begin to unfold as so many predict. Sell in May? More like hedge in May.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.