Reading time: 2,777 words, 18 pages, 7 to 11 minutes.
“Sell in May and go away” is an old pre-summer adage for stock market investors. It means selling your stock portfolio in May to avoid the historical decline or underperformance of stocks until October. There is considerable evidence presented below to support this saying. On the other hand, ‘our owners’ are propping up the stock markets so should we sell or continue holding?
Many people believe that equities are in bubble territory and bubbles inevitably collapse. However, inevitable is not immanent. And, there may yet be a blow-off surge in stock prices before the correction. No one wants to sell too early and miss the top.
If you agree with that last sentence, you need your head examined. Nobody and I mean NOBODY ever sells at the peak except liars. I’ve learned long ago that it’s impossible to buy at the exact bottom or sell at the exact top. The best we can do is try to capture some of the trend.
I’ve also learned long ago that it’s better to sell too soon than too late. Once the selling starts there’s a herd of investors trying to squeeze through a small exit and they inevitably chase prices down. Fear is much more powerful than greed which is why equities go up like an escalator and down like an elevator.
So what to do? Before we go any further, here’s the disclosure: I am NOT an accredited financial advisor so I cannot make your investment decisions for you. What you do is entirely up to you and your own investment professional. That’s why you pay him or her (and not me).
However, what I can do is tell you what I’m doing and why I’m doing it. And what I’m doing this year is selling in May. I’ve begun dumping 75% of my equities; taking both profits and losses and dumping the laggards. I’ll remain in solid, dividend-payers strictly for the cash flow and wait for their prices to recover. They always do. Eventually.
There are many factors trying to drive stock prices lower. What we don’t know and what remains to be seen is whether these factors are strong enough to ‘fight the Fed’ and overwhelm ‘our owners’ manipulation of the rigged markets.
Furthermore, not everything points to a correction or a crash.
Factors against a Crash – the Positives
– USA Today reports that last year the S & P rallied 10% during the summer.
– Fox Business reports, “Property-tax collections are rising at the fastest pace since the U.S. housing market crash…” However, revenue increases of as much as 13% are coming out of the consumer’s pockets leaving less for discretionary spending. Furthermore, there are no plans for increased public service hiring after cutting jobs for more than five years.
Insolvent and spend-thrift governments have obviously not learned any painful lessons. Public service unions still lead them by the nose. San Jose is, “using the extra cash mostly to cover rising costs for employee health care and pensions” and Mayor Chuck Reed laments “The real-estate market will help us not have to cut services, but it is not strong enough to give us enough revenues to overcome these increasing costs.”
– Joshua Brown reports that business economists are upbeat. However, there have been, “four annual false starts for escape velocity since 2010,” so that track record doesn’t look good.
– Doug Short reports that the April U. of Michigan consumer sentiment improved from March as seen on the chart below.
However, I’m a hard-ass who disparages fickle feelings so I don’t put much stock in volatile consumer sentiment. Besides, at 84.6, it’s still below the average of 85.1 and well below the pre-recessionary average of 87.4.
The real job-creator in the U.S. are small businesses, so I’d give a lot more weight to business confidence. The chart below shows it’s been range-bound for two years and still well below the average of 100.
– Calafia Beach Pundit reports surging U.S. oil production. However, shale fracking is over-rated with a depletion rate far greater than conventional oil and gas so this benefit is fleeting.
– Bloomberg reports, “Corporate America is putting its record $2 trillion cash pile to work.” Still, that hasn’t helped job growth (governments’ cooked statistics notwithstanding) that is necessary to revitalize a consumer economy. Companies are more inclined to increase dividends and buy-back shares than hire new employees.
– Andrew Flowers reports there is less economic uncertainty because of fewer major economic policy issues. However, uncertainty indices are speculative and, like the VIX Index (aka the ‘fear gauge’), it measures sentiment which is transient and changeable.
– Econointerest reports that durable goods growth was strong in March. However, the chart below shows that’s only a blip comparatively speaking.
Furthermore, it’s not inflation adjusted and, like most government statistics, it is ‘seasonally adjusted’. “The issue is that the exceptionally large recession and subsequent economic roller coaster has caused data distortions that become exaggerated when the seasonal adjustment methodology uses several years of data.”
– Brian Gilmartin reports that there is improvement in corporate forward growth rates. On the other hand, it is largely driven by Technology consisting of such bubble ‘vapor-ware’ as Twitter whose market capitalization of $35 billion Rick Ackerman describes as, “putting it in the same league as John Deere, News Corp., Halliburton, Biogen and Prudential Financial. This, despite the fact that the Internet messaging service, with hundreds of millions of followers, has yet to earn a dime of profit — or even to figure out how to earn one … Our hunch is that the epic stupidity, hubris and greed that made Twitter’s IPO such a success will mark the top of the second, and presumably last, dot-com boom.”
On the other hand, stock market crashes are rare in the summer. As well, the mainsleaze media are jumping aboard the ‘Sell in May’ bandwagon this year as if preparing the ‘muppets’ to get fleeced by bailing and missing out on the last surge. The smart money usually goes against popular sentiment. We shall see.
Of course, the parasites who make money regardless are the stock brokers who advise that, “the best strategy is not to outright sell in May but rather to take a defensive posture.” Translation: churn your portfolio by selling performers and buying cheaper (good luck!) so-called ‘value’ stocks because buying & selling earns your broker more fees and commissions. Not to put too fine a point on it, but they’re in it for the money and not your benefit.
History Says Sell in May
As Mark Twain is alleged to have said, “History may not repeat itself but it does rhyme.” So, let’s briefly examine some history.
If you look at the record, it makes sense to sell in May (or earlier) in most cases (except 2013). See the graph of the S & P 500 below.
As you can see above, “sell in May and go away” is right more often than wrong.
Another way to look at seasonality is compare the six ‘summer’ months in red on the chart below to the six ‘winter’ months in blue.
All things being equal, the weak performance of the summer six month period may be reason enough to bail out, especially if there are strong factors pointing to a crash. And, there are many such factors as you’ll read below.
Factors for a Crash – the Negatives
Below are factors heralding a stock crash or ‘correction’. You’ll see there are much more of them and they’re far stronger than factors AGAINST a crash outlined above.
– Russia and the West are replaying the Cold War in Ukraine creating much uncertainty.
– Frothy tech stocks are replaying a 2000-style pullback.
– U.S. midterm elections often see a market low during this period.
– Credit crunch in China
– Slowdown in China
– Slowdown in the rest of the BRICS
– Upcoming European elections
– Tapering of QE
– The Russell 2000 is at 80 times earnings so consequently over-priced.
– Stocks are at all-time highs. As Financial Times reports, “With stocks locked in a tight trading range a little below record highs, and after a multi-year bull run, there is now fierce debate over whether equities can enjoy substantial further gains.”
– Corporate revenue is weak and falling. Bespoke Investment Group reports that the number of companies beating revenue estimates is only 50%. “Since the bull market began, the revenue beat rate has been 59%, so we’re about 9 percentage points weaker than average right now.”
“Last earnings season, the revenue beat rate was very strong at 63.8%, so a beat rate in the 50s would represent a pretty big quarter-over-quarter decline.”
– Testosterone Pit reports, “[U.S.] Home sales are collapsing while inventories are soaring in six housing markets that had been white-hot just a few months ago.” And, John Rubino headlines, “Why Housing Has Stalled — And Why Everything Else Will Follow”
– Margin debt is decreasing. ’Margin” is money borrowed to buy stocks. Agora Financial’s ‘5 Min. Forecast’ says that in a “market correction, investors would start getting margin calls. They’d have to either pour more money into their accounts or, more likely, sell some of their positions. The selling would beget more selling, which would then beget panic selling, until we had an instant rerun of 1929 or 1987.”
– The Testosterone Pit also reports, “The last two times when margin debt reversed and fell after a record-breaking spike, all hell broke loose. In 2000, it was simultaneous. In 2007, it was delayed by a few months.” See the graph below.
S & P 500 margin debt is decreasing and NYSE is still climbing and both have reached unprecedented (THAT word again) and historic high levels. The bigger they are, the harder they fall.
– The world’s largest economy is slowing down. Zero Hedge headlines, “US Economic Growth Crashes To Just 0.1%”.
– Severe winter weather has conspired against the economy as well. Mining Weekly featured a Reuters report, “The biggest ice cover on the Great Lakes in decades is backing up shipments of everything from Canadian grain to US iron and steel in one of North America’s most important economic regions.
“The frigid winter and cool spring have hurt companies like Cliffs Natural Resources and United States Steel, and also hampered efforts to clear an unprecedented buildup of grain and oilseeds in Western Canada.”
Pictured above is a Canadian Coast Guard ice breaker cutting ice around anchored empty ships still surrounded by late spring ice awaiting berth for loading at the port of Thunder Bay on the headwaters of Lake Superior. A fourth ship is out of view. The shipping season, typically starting in March, is delayed more than a month.
– U.S. mortgage rates have spiked, reversing a 32 year downtrend as shown on chart below.
Dan Steinhart, Managing Editor, ‘The Casey Report’ writes that,
“even small changes in mortgage rates reverberate to all corners of the economy. When your mortgage payment rises, your discretionary income drops, so you both spend and save less. Follow that daisy chain to its logical end and you’ll find that, to varying degrees, all businesses are at the mercy of mortgage rates…”
And, just when you think it can’t get any worse, ThinkAdvisor.com reports, “Middle-class retirees will need to use their entire Social Security payout to defray health care costs.” Translation: kiss discretionary spending, consumers and what’s left of the middle class good-bye.
Other Negative Factors
Prometheus warns that, “measurement of investment risk is not a top call or an indication that a severe market decline is imminent. Overbought rallies such as this one can remain overbought for a long time as speculative momentum carries prices to higher and higher extremes.”
He warns against fighting the Fed but presents the graph below showing that the risk/reward ratio is at unprecedented (that word again!) historically high levels.
Prometheus also explains that prior to the bubble busting in 2000, the large capitalized equities were over-valued while the less glamorous stocks were still struggling. However, nowadays the Fed has thrown so much fuel on the fire that, “the Fed has produced what is now the most generalized equity valuation bubble that investors are likely to observe in their lifetimes.” Translation: EVERYTHING is rigged and over-priced. Warning: nothing lasts forever.
64 Month Stock Market Crash
Dave Nichols warns about a 64 month stock market crash cycle. He says, “All the ‘name-brand’ market bubbles in history have lasted 64 months from initial growth to blow-off top … If it’s an unsustainable growth pattern heading for a crash, it carries this 64-month time signature.” He lists the following examples:
– the Dow into the 1929 peak
– the Nikkei into the 1989 peak
– the Nasdaq 100 into the 2000 peak
– home-builders into 2005
– crude oil into 2007
The one exception was October 1987 chart below. “The top in 1987 came at Month 61, with Month 64 turning out to be the post-crash low.”
The driving force behind this 64 month cycle is fractal scaling. Nichol says a full explanation is, “beyond the scope of a short web post but the sound-bite explanation is because this is aligned with the fractal scaling constant that can be observed in all facets of human life on planet earth. It is not a coincidence that the retirement age is 65 years, or that there are 64 – 65 trading days in 3 calendar months (one season). These patterns work across all timeframes. A 64-day growth pattern is seen frequently during strong market uptrends, and it can also be readily observed on hourly charts, and even 5 minute charts.”
The S & P 500 index below is approaching that critical month 64 in June (or July if it extends to month 65).
We shall see in a month or two if this plays out. On the other hand, one of the most reliable forecasters is Martin Armstrong. When the Feds tried to strong-arm him into surrendering his forecasting model, he refused and was sentenced to five years in prison for contempt of court. I read the newsletters he wrote while doing time. Serving seven years of a five year sentence made him the longest serving prisoner for contempt in the fascist state of the USSA.
He uses Pi X 1,000 days to forecast crashes so 3,141 days or 8.6 years from the DOW crash in March, 2009 puts it at the end of 2017. And James Gruber agrees when he says, “Given a rate hike is likely to happen next year at the earliest, that means a more substantial market correction will have to wait to 2017, if history is any guide.” However, (ever notice there’s always a ‘however’?) he also says, “The key risk to this scenario is a deflationary bust, precipitated by Japan and/or China.”
Conclusion: the negatives greatly outweigh the positives. Only the timing is unknown and as Yogi Berra once said, “predictions are hard to make, especially about the future.”
However, (I had to throw that in 🙂 ) I am reminded what one astute reader commented.
“For every stock market crash the probability of someone showing that he predicted it is nearly 100%.
“For every prediction of an imminent crash the probability of it being correct is almost zero.”
So, with that in mind, I realize that predicting stock market crashes is a fool’s errand, but I’d rather be safe than sorry. The stock markets now are just too good to be true and I know better than to try to time the exact top. So, this contrarian is bailing out until I see some blood running in the streets.
Until then, I’m going to enjoy the summer (if we ever get one).
Your cowardly investor,
May 4, 2014
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Gerold, I just came across your blog a month ago and it has been a thoroughly enjoyable experience making my way through your posts. Please keep it up.
In GMO’s Q1 newsletter, Grantham et al approach market risk from fundamental and sentiment approaches, coming to the conclusion the market is between somewhat and dangerously overvalued.
Click to access GMO_QtlyLetter_1Q14_FullVersion.pdf
Thanks for the kind words, Jason.
Thanks too, for the link. It’s always good to read Grantham, the ‘father of value investing’.
He says that what he does is, “prepare prudent investors for the probable future pain so that they can more easily process it and be less likely to do something foolish.” In a nutshell, that underlies the purpose of my post. Not everyone’s prepared to bail out, especially long-term investors so at least it won’t be a complete surprise for them.
Glad you mentioned Martin Armstrong, Gerold – was going to post a link where he was discussing this very same topic, but think you’ve provided more than enough of an argument for both sides.
The safest thing would likely not be invested in the giant ponzi/casino finance system whatsoever, but I recognize that isn’t for everyone. If I find the courage not to be so fearful of the markets, I may avoid them for the summer but then jump back in for late 2014 and into early 2015 before cashing out completely. Until then, I only dabble in small volumes of ETFs set up to replicate the US dollar (in addition to buying up physical US dollars).
Seems like there will be a rush to safety at some point (Russian/Ukrainian war? China/Japan conflict? Canadian housing market collapse? More Middle Eastern mayhem? Further Fukushima follies? Severe weather related events? Falling meteorites and Goblin Sharks!?! etc.), and I think the US dollar has an upwards way to go before crashing back down into the scrapheap of fiat currency history.
In the mean time we can both kick back, relax and enjoy the idiocy which is the Ontario provincial elections in June. Woo-hoo…
Good to hear from you again, GBV.
I think you’re on the right track waiting for late 2014 or early 2015 rather than jump in now close to the peak.
And, you’re right about there being so many black swans – any one of which could detonate the bubble (I love mixing metaphors). “Goblin sharks”? Wonder if Wizards of the Coast have come up with an MTG card for this yet?
Yes indeed, the upcoming Ontario elections should be a circus, the total cost of which divided by the population means much entertainment for a minimal admission fee. Too early to call it, though. Staying tuned as it gets stupider …