Don’t Be Quick to Sell (or Rotate) in May



This week marks the start of what the Stock Trader’s Almanac refers to as the “worst six months” for the stock market. Relative to the “best six months,” stocks historically underperform during the period of May through October. Underperformance, however, should not be confused with losing money. Sam Stovall, the U.S. equity strategist at S&P Capital IQ, calculates the S&P 500’s annualized return for the worst six months period as being 1.4%. (Sam’s analysis starts on April 30, 1945.) Note the lack of a negative sign in front of the number: Stocks have, on average, realized gains during the worst six months.

Not every worst six-month period works out for investors. There have been some worth avoiding. Those of you who read Barron’s might have seen the data quoted from Bespoke Investment. The folks at Bespoke calculated an average return of -0.21% (yup, there’s a negative sign in front of the number) for May-October periods whenever the market was flattish during the first four months of a calendar year. This year happens to be one of those flattish years, with a 1.74% total return between January 1 and April 29. Before getting nervous, consider the sample size: there have only been 16 such occurrences since 1928. Plus, trends only last until they don’t.

There are tactical strategies an investor can use. Stovall compared four such strategies against a strategy of simply staying fully allocated to the S&P 500 index over the last approximate 25 years (December 31, 1990, through April 22, 2016, to be exact). Simply staying allocated to the S&P 500 without making any changes resulted in an annualized gain of 9.9%. Going to all cash between May and October reduced the annualized return to 8.9%, though it did have the lowest level of volatility of all five strategies. Moving into an investment tracking the broad Barclays Aggregate bond index (the iShares Core U.S. Aggregate Bond ETF (AGG) does this) boosted the annualized return to 11.3%. Sticking with stocks, but instead rotating into an investment tracking the S&P 500 Low Volatility index (the PowerShares S&P 500 Low Volatility Portfolio (SPLV) does this) boosted the annualized return to 11.9%. A statistically better strategy that Stovall has long talked about is rotating into the health care and consumer staples sectors (you can use the Health Care Select Sector SPDR (XLV) and the Consumer Staples Select Sector SPDR (XLP) to accomplish this). This strategy, according to Stovall, has delivered a 13.1% annualized return.

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AAII Sentiment Survey

Optimism about the short-term direction of the market fell to a three-month low. More about this week’s results.

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The Week Ahead

AAII President John Bajkowski will speak to our Washington D.C. Metro Chapter on Saturday, May 14, about how to find a winning stock.

Earnings season is starting to slow down as only 22 members of the S&P 500 are scheduled to report. The only Dow Jones industrial average component on the docket is Walt Disney Co. (DIS), which will report on Tuesday.

The week’s first economic reports will be March JOLTS (Job Openings and Labor Turnover Survey) on Tuesday and April import and export prices on Thursday. The week will close with the releases of April retail sales, the April Producer Price Index (PPI), March business inventories and the University of Michigan’s preliminary May consumer sentiment survey on Friday.

Five Federal Reserve officials will make public appearances: Chicago president Charles Evans and Minneapolis president Neel Kashkari on Monday; Cleveland president Loretta Mester and Kansas City president Esther George on Thursday; and San Francisco president John Williams on Friday.

The Treasury Department will auction $24 billion of three-year notes on Tuesday, $23 billion of 10-year notes on Wednesday and $15 billion of 30-year bonds on Thursday.

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