Should I Sell in May and Go Away?

Yes, the data clearly supports that it is prudent to sell long-term positions in May. We’ve spent years (decades, really) studying data and developing models that provide an edge in the markets. You may have heard that it’s impossible to beat the S&P 500 average in the long-run. While in most other endeavors in life, ambitious people rarely strive to be average – why should we hope that being average is somehow as good as it gets or even better than most professionals? This logic doesn’t make any sense to us. Year after year, we were encouraged to achieve grades higher than a “C” average starting in kindergarten through graduate school. Why settle now?

Here’s one straightforward example of how to beat the market averages, on average. When studying S&P 500 returns over the last 90 years, we see that the vast majority of the gains occurred during the six-month period from November through April and a much smaller portion of the gains occurred during the months of May through October. Even over the last 20 years, 85.2% of the gains happened November through April whereas only 14.8% occurred May through October.

The following summary shows the results if you were to have invested $100,000 at three different starting years: 1927, 1990 and 2000.

20200515_SIMGA_performance

In all three scenarios, Sell-in-May-and-Go-Away (“SIMGA”) beat Buy & Hold (“B&H”), proving that beating the market averages was as simple as going long the S&P 500 during the months of November through April and then liquidating at the end of April. Furthermore, your risk exposure would be a fraction of the buy-and-holders – so you’d earn higher overall return with less risk.

Why is this? Market historians point to the farming cycle and more recently to vacation cycles. Traditionally, agriculture markets are relatively inactive during the summer months as the crops have been planted and are slowly growing in the fields. Then, after the Fall harvest, the activity rapidly increases as the crops are harvested, distributed, and converted to consumable products. In more modern times, the summer months slow down due to vacations and the school cycle. And, major financial centers (New York, Boston, London, Frankfurt, Tokyo, and Shanghai) are all based in cold Northern climates that thaw in May for a fairly short period of warm months. Instead of staring at a computer screen or locked in investment allocation meetings – key players are on the golf course, fishing, vacationing, etc. And even in several major economies, August is a vacation month with a high percentage of business activity halted.

For 2020, it seems like a unique case to support this sell-in-May view as we have record unemployment, unprecedented rapid deterioration of the economy, and a full-blown global pandemic underway. And as the media turns their attention to the election process, it’s unlikely to provide stability to the financial markets.

For disclosure, we don’t actually trade based solely on such simplistic models; nor does seasonality factor directly into our decisions. However, it’s likely that seasonality does influence the data that we process as outlined above. We hope you at least find this general observation interesting and maybe useful for some of your longer-term investment decisions.

Forte Strategy Update

The oil and equity markets remain volatile at a level 2 – 5 times the historical averages and, therefore, these trading models are inactive for now. The gold market volatility has fallen to a reasonable historic level so this model now restarted. We’ve traded 5 times this month so far for a net loss of 0.3% month-to-date.

More details about our trading activity can be found by registering on the Collective 2 website and searching for Forte Strategy. A running list of these email blogs and general information about Maestro Capital Research can be found at https://maestrocapitalresearch.com/.

Market Update

20200515_sp500_chart

  • The standard five-wave Elliott Wave pattern held and a subsequent a-b-c pattern formed.
  • The 200-day simple moving average (200 SMA) has also held as resistance.
  • We’re now bouncing within the 50% and 61.8% Fibonacci retracement levels.
  • Uptrend momentum continues to decline (note PFE).
  • Volume ticked up during this past week’s bearish days.
  • If the 200 SMA holds over the next week or so, we will become increasingly concerned that we’ll see another large leg down (possibly below the March 23 intraday low of 2200)

Another observation we made over the last few days:

20200515_FF_pricing

On May 3rd, we mentioned government intervention being the “wildcard” that may continue to prop up the markets (at least in the near term) with negative interest rates (NIRP) being the potential precedent-setting game changer that could put a quick end to this bear market. Although Fed Chairman Powell stated this week that the Federal Reserve would NOT resort to negative rates to counteract the coronavirus recession, the Fed Funds Futures market begs to differ. The yellow circle above shows where the March, April and May 2021 contract prices breached the all-important 100 level. Why is this important? We’ll avoid a long-winded explanation and get to the point: banks and fixed-income portfolio managers are now wagering that Powell WILL indeed be forced to resort to moving the fed funds target rate (which is the interbank overnight lending rate for commercial banks’ excess reserves) below zero within the next 10 months! This is a very bearish sign.

As always, thanks for your interest. Please stay safe and healthy.

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