04 May 2011
Many of my clients know that I rarely pay an ounce of attention to cute little adages like "sell in May and go away". I am not a big fan or believer in any investment season or statistical presentation that should dictate how your portfolio should be allocated. Does the stock market really know when we turn a page in the calendar? Does it care if it's Halloween or prepare itself for the outcome of whether an NFC football team wins the Super Bowl over an AFC team? I don't think so but for some very obvious reason the media does a fantastic job of blasting us with headlines and supposed market truths on occasions such as these. Why is it or could it be "different this time"?
First and foremost, even if it could be proved beyond any doubt that the month of May and some of the following ones are not friendly to the markets, how do you manage for that? There is no magic announcement on whether selling May 1st or May 30th is the right time. If you were fortunate enough to pull the trigger in advance of such a date you also are now given and equally greater challenge of knowing when to get back in the markets. Many investors have made instinctive or simply lucky calls on timing the market but doing so twice is where it becomes a losing proposition. There are other implications that follow such as taxes and investment trading expenses that typically don't bode well for making such moves.
Now that I've broad brushed the topic and seem to portend that it's not worth your time or money in reading another CNBC fear stoking headline, allow me to discuss what the supposed 'sell in May and go away" phenomena is and why it may make sense to consider it this time; at least with a rational approach and with less reliance on a properly functioning crystal ball.
Markets are indeed cyclical as they predict what the economy is doing. There is truth to the markets being historically weak from May to November but that typically occurs when the Fed is tightening. With QE2 ending this June we will be in a neutral phase with speculation on further moves. The Fed ideally wants to avoid any tightening policies to avert dampening the economic recovery. More than anything, I see the coming months as ones where the headwinds and "wall of worry" that this market has climbed will become more apparent. Employment numbers still are rather dismal, there is continued unrest in the Middle East, and with oil prices climbing we are more than likely to see the markets take a breather.
I don't gamble and I don't market time, but it would be my strong inclination that rebalancing to a much more defensive position over the next three months is the prudent call for most. In my opinion, and how I manage portfolios, I believe there is never a time to completely "get in or out" of the market. You can always be flat wrong and to recover the potential lost ground puts you in a situation of being emotional and further compounding the mistake. We will hold much of our base allocation models but over the next few weeks there will be cash raised. This measure does not call for the other extreme of shorting, put options, or even necessarily hedging our "bets" with other instruments, but rather a simple and disciplined approach to taking some profits and money off of the table. This isn't a time to get fancy but rather manage money, risk, and volatility wisely. Besides....there is one saying I have read and believe in..."you don't go broke taking profits".
Lastly, unlike many media outlets or market newsletters, this article will be followed up with specific examples of when and what we buy back into. For now, we are suggesting a first step in reducing exposures to all equity asset classes by 10%. (Large, Mid, Small, International, and Emerging Markets) There could be the case to make a more aggressive adjustment, but being early in the month and after this extended period of strong returns, we'll hold the ship in this direction for now.
Stay tuned for more updates...