I received the following question;
What’s your current thinking this year to the old adage: “Sell in May and go away”? (for the summer that is, for the folks not familiar with the saying)
I’m in a rather large 40% cash position at the present time.
I don’t really act on these sorts of things in a meaningful way for a couple of reasons; first is that there may not a enough of a fundamental case to do it. The second reason is that I think I heard recently that it only works 54% of the time. I may have that wrong.
I can also recall, however, another study that showed the market does much better from November until May by a dramatic amount. The nature of this second study I am vaguely remembering focuses more on better returns during the winter as opposed to declines in the summer. Anyone with specifics on either is encouraged to leave the links.
Obviously in 2006 sell in May was 180 degrees wrong. In looking at the Stock Trader’s Almanac for the last ten years from May to October inclusive sell in May was also wrong in 2005, 2003, 1999 and 1997. Selling in May looks like it was right in 2002, 2001, 2000 and 1998 and I am going to say it was a push in 2004.
I did not look further back due to time constraints and I would not really be able to defend an argument that says the time sampled is flawed, maybe because it includes the bubble and the aftermath. Hopefully you have a Stock Trader’s Almanac and you can study it further if you are so inclined.
The way I might incorporate sell in May into my thinking might be to sell one stock for a little cash if I thought the market was extended. I currently have a stop order for a portion of the position for one across the board holding that is up a lot. As the market has had a big run if the stop order gets elected I don’t think I would redeploy that cash. There are also one or two more other names that are up a lot that I have been mulling partial stop orders for.
Having three stop orders as described above all execute in a downturn seems compelling to me. It would probably raise 3-4% in cash, not a big bet but a way of letting the market reduce your exposure.
Big bet. I think that is what the reader has made by having a 40% cash position, unless of course the other 60% is in double long funds. The dilemma with such a big cash position is knowing how to get back in. I would not know what to do with such a big cash position taken for tactical reasons.
I have been bearish for nine or ten months. I have chronicled many times my skeptically going along for the ride so clearly I have no useful input for anyone with such a large tactical cash balance.
The thing that should be feared is down a lot. While that is the case, the thing to consider is that down a lot doesn’t happen very often but when it does happen it gives plenty of time to get out. I would urge anyone managing their own portfolio to learn the history of this. I would add that down a little, like late February, should not be feared nor traded around by most folks.
The obvious question that would arise from that last paragraph is how do you know that a decline, like the one that started on February 27, won’t be big? Well you can’t know but you can put the odds in your favor. Fast moves down that create fear usually come back fast. Slow moves that don’t bother people have historically been more of a problem for the market.