As a stockbroker years ago, I remember telling my clients to “sell in May and go away”. That got me thinking about the current market condition. I imagine that some nervous investors (or short-term traders) may start to do some selling in an anticipation of a possible May pullback. That’s exactly what happened last May. Adding to those concerns is that fact that the market is in a short-term overbought condition. This afternoon while I was writing this post, the market sold off 100 points. I had to smile as I looked at the title of my post.. “get out in May and stay away”.
In the following chart, VIX is starting to climb … Another short-term cause for concern is today’s jump in the CBOE Volatility (VIX) Index. That’s because the VIX trends in the opposite direction of the market. The VIX has been dropping since early March when the lastest market upleg began. The daily bars show the VIX reaching a four-week high today and breaking its resistance line. The daily MACD lines, which have been negative for two months, turned positive today (red arrow). A rising VIX is usually a warning that the market is vulnerable to some selling.
While most adages have some grounding in reality, this Sell in May saying has investment teeth. The adage and all studies focus on the large-cap group of stocks found in the Standard & Poor’s 500 Index what happens if you sold whatever S&P 500 device suits yours fancy (i.e., an index fund or an ETF like the SPDR Trust, at the end of April and stayed away until the beginning of November, and then bought back again and hung on through the end of the next April, ad infinitum. The result of doing so: over the past 6 years, you would have made 35.0% vs. 27.2% for those that bought and held throughout the time period. (Note: the trend holds up for mid-cap and small-cap stocks, too.)