'Sell in May' Advice should work this year

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Good news will slow after Q1 earnings season

Don And Jon Vialoux, Financial Post  
Published: Saturday, April 24, 2010

Investors frequently hear about the "Sell in May and go away" strategy about this time of year. The strategy implies that investors should jump ship at May highs with their loot of gains, spend the profits over the summer, then crawl back to the market in the fall to replenish the stash. It seems reasonable but history does not support the strategy.

Over the past 10 years from the end of April to the end of September, the S&P 500 has climbed in five periods and moved lower in five for an average decline per period of 2.64%. The S&P/TSX composite index gained in six periods and fell in four for an average gain per period of 1.50%.

The reason for random performance during the summer is a lack of annual recurring events that have a significant influence on equity markets. Summer is the time of year when interest in equity markets wanes and day-to-day volatility increases. To put it bluntly, the only highs and lows of concern to investors are in the daily temperatures.

That does not mean investment opportunities do not exist. Several sectors historically have moved higher during part of this period because of annual recurring events. These include health care, biotech, consumer staples, utilities and energy.

Biotech stocks rise in anticipation of news from several oncology conferences in the fall, and energy in anticipation of complications at refineries as refineries switch from gasoline to heating oil production ahead of winter. All these sectors deserve watching for a seasonal trade as summer approaches.

Gold, cattle and sugar tend to rise through summer. Gold gains in anticipation of purchases by refiners who make jewellery for the Indian wedding and Christmas seasons.

And talk about a sugar high. Commodity futures for sugar see gains in anticipation of crop yields and potential weather disturbances impacting supply. Cattle prices are influenced by meat production, which keeps producers busy from May into July.

Will "Sell in May and go away" work this year? Probably. Favourable economic and corporate news released last week is likely to continue until the end of the first-quarter earnings report season. Results beyond the first quarter are expected to compare favourably with results during the same period last year, but are likely to be less impressive.

U.S. mid-term elections also play a role. History shows that U.S. and Canadian markets tend to peak in the third week in April and bottom at the end of September during a U.S. mid-term election year. This is the time when political rhetoric becomes loudest and economic uncertainty related to future political control become greatest.

Greece's fiscal troubles are likely to continue to roil markets. The U.S. dollar is under attack by nations such as China, Russia, Brazil and India. The recovery in Europea is fragile due to growing sovereign debt and, most recently, from the volcano in Iceland. Attempts to persuade Iran to give up nuclear ambitions will need to be addressed.

The Federal Reserve's "easy money" monetary policy is ending. The Bank of Canada hinted last week is may raise interest rates as early as June.

U.S. equity markets waved a warning flag last week when investors sold on news after major companies announced higher than expected first quarter results. Meeting expectations is no longer acceptable, as investors now crave something more to sustain these optimistic levels.

The bottom line: Prepare to take profits on strength in seasonal trades during the next two weeks as earnings season winds down, thus decreasing your exposure to the broad market. But as always, the markets will be waiting for your contributions when you crawl back in September to replenish the "summer fund."

Read more: http://www.financialpost.com/tod ... 45671#ixzz0m9Xmvj7p