From the Editor - October 05

The commentary below is from our monthly newsletter and is provided here as a convenient reference for our readers.

“Sell in May and Go Away”

There is a belief among some investors that one would do well to cash out of the market at the end of each May and wait until the following November to reinvest. Aside from the issue of taxes and inefficiencies involved with buying and selling an entire portfolio each year, the idea actually has some merit. There have been a few studies done that demonstrate that stocks do in fact fare better during the six month period from November through May than in the other six month period. On the other hand, there are also “studies” that show the direction of the stock market can be determined by knowing which league wins the Super Bowl. Statistics are wonderful things.

However, there is some basis for the idea that November through May represents a better time to invest on average. For a number of practical reasons, more money tends to pour into the market during these six months than in the rest of the year. Think 401(k) investments and IRAs. They are most often funded during this period, and much of that money usually finds its way into the stock market. More money investing in stocks equals a higher stock market (all else being equal).

If liquidating your portfolio in May and purchasing again in November is nevertheless not the best course of action for most investors (and we suggest it isn’t), then how does one take advantage of this phenomenon? Is it even possible to profit from this knowledge?

The answer over the longer term is yes. Consider, for example, the fact that October is statistically the worst month of the year to be invested in the stock market. And yet, coincidentally (or is it a coincidence?) October comes just before November, which is the start of the “good season” for stocks. This editor has taken advantage of this fact for many years and purchased stocks in the Model Stock Portfolio during October on major dips, in some cases even employing modest leverage from October through year-end. Buying in October when all the so-called experts are selling is tough business, but the results can pay off. Such is the nature of contrarian investing.

Will this year be any different? Answering this question is little more than guesswork, but then our guess is just as good (or bad) and the next person’s. And our guess is that we’ll see another November-May period of above-average performance in the stock market. People are slowly becoming acclimated to higher gas prices, the hurricane season is nearly behind us. Both factors have been a drag on the market. Plus, the holidays are coming, a time for people to spend, spend, spend, and make merry. That’s good for the economy and good for the stock market. The biggest negative factor weighing on the markets is what the Federal Reserve will do with interest rates. The Feds will probably continue raising rates through the middle of next year. This will continue to drag the stock market down. And yet, as soon as the market sees the end in sight for rate increases, it is most likely to “celebrate” by moving up again.

So there is our educated guess. It is worth as least as much as you pay for this newsletter.

Happy investing.