A friend reminded me of what I wrote last year about the month of May.
At that time, I suggested the old Wall Street adage to “Sell in May and go away!” as a trading theme and strategy for the month.
Looking back at how the market had been behaving since the start of the month two weeks ago, this market aphorism seemed to have not lost any relevance at all. It looks very much pertinent now as it was before.
Especially last week, the market lost so much ground. After being up 128.50 points at 5,297.55 the week before, it ended down and lower last Friday by 139.41 points at 5,158.14, equivalent to a 2.63 percent loss on a weekly basis.
Come to think of it, such market sayings would not have been posited if they did not hold or embody some traces of general truths.
May of last year
Consulting the records, the market indeed fell in May last year. This happened after the main index was propelled into a fast upward climb of 102 points in a period of one week toward the end of March, followed by another 120-point rise in April. This rendered the market overbought and, thus, the fall in May. The market was unable to advance any further during the month, as it succumbed to profit taking.
Since the market’s retreat was only to relieve itself of short-term players, the fall was superficial. The momentum to resume an upward trend remained.
On a monthly basis, the market loss was only about 74.87 points, or 1.73 percent, from the level in April. This was because the market made two attempts to head upwards during the month, absorbing the effects of profit taking. These happened after the market hit its lowest session closes on May 6 and May 25, 2011, at 4,244.73 and 4,221.69, respectively.
Since the market was technically overbought, it had to take a short respite and consolidate in May. It could not really have gone up any further in May because, based on the larger picture created then, market movements did not end up in any of the chart patterns that led to upward market reversals.
When it hit bottom at 3,705.10 on February 28, the market fell on some 45-degree angle pattern withstanding the small rallies that could have transformed and modified the market’s fall into what are called reversal patterns like the “saucer.”
This was confirmed by the market’s daily trading volume stats when it was hitting bottom. The market’s daily trading volume figures were not that low as to amount into a reversal trend attributable to a saucer pattern or into what the book terms as “the technical charting formation that indicates that a stock price has reached its low and that the downward trend has come to a close.”
It was, therefore, no wonder that the market in May last year was almost patently obvious to fall as it could not but consolidate as a result of the impact of the reasons behind the market adage.
Some narratives
The market adage of “Sell in May and go away!” is a US variant of the so-called “Halloween Indicator” followed by some countries in Europe.
The “Halloween Indicator” held that November to April was the strongest growth period of the year, while the following months were the slow period, with May as the weakest.
For this reason, investors were said to sell in May and held on to their funds—possibly investing in fixed income instruments—until autumn, “typically around Halloween,” when it was considered auspicious again to buy back stocks.
This, however, comes more as a matter of conventional wisdom than science, for it is “not given serious consideration in academic circles.”
It is an adage that has popular support but does not have substantial empirical basis to be considered a reliable seasonal event—or one that you and I can bet on to recur year after year and win your game in the market.
Bottom-line spin
In summary, the market may again move sideways to lower this month as it did before. It could be as brief as it was last year, too.
And this is going to happen not as a result of the market adage to “Sell in May and go away!” but more of the impact of recent global events that have sent, to use the title of one financial report, “Wall Street logged its worst week of 2012.”
To recall, the threats brought about by these developments had driven global markets to fall before. Because they had also sent the local market to fall lower before, they could again push down the market in the next few days with the possibility of driving it to retest the 5,000 level.
Should this happen, the month of May this year could be more of an opportunity to “buy” than “sell.” It should be a time to start “stalking” stocks because at the 5,000 level, stock prices will turn to be attractive buys based on their estimated company earnings for 2012. And the best type of stocks that may fit well in this connection will be the so-called “growth” and “turnaround” stocks.
Growth stocks are those whose company earnings are expected to grow from now on, even at rates higher than the average rate of earnings in the market.
Turnaround stocks are those that had been out of favor from the investing public because the concerned companies had been performing poorly, but due to some new developments, they are bound to experience improved financial health, viability and profitability.
(The writer is a licensed stockbroker of Eagle Equities Inc. Market Rider can be reached through marketrider@inquirer.com.ph, densomera@msn.com or at www.kapitaltek.com.)