Saw the following seasonality chart that illustrates the old adage of “sell in May and go away”.
It’s a great visual. By chance I also read Jeremy Grantham’s quarterly GMO letter that addressed this seasonality in the context of year 3 of the Presidential Cycle:
In the first 7 months of the third year since 1960, Year 3 [of the Presidential Cycle] has returned 2.5% per month for a total of 20% real (after inflation adjustment). In contrast, the second 5 months after May have delivered an average return of 0.5% per month, as does the fourth year of the cycle. Now, 20% is perilously close to the total for the whole 48-month cycle of 21%. This means, of course, that the remaining 41 months collectively return a princely 1%. This offers a brilliant, lazy investor’s rule: “Sell in May of Year 3 and go away for 41 months.” Whoopee! The unfortunate caveat is that there are only 11 entries for this analysis so it may well be pure luck. Still, it’s intriguing, especially if you like sitting on the beach for 41 months.
Regardless, selling in May isn’t a bad rule of thumb even in year 3 of the Presidential Cycle.
Independent of the above, I’ve already put on the bear hat:
- “SI” is on the down trend
- Sentiment spread has been on the mid-to-high 30’s for 3-4 weeks
- The weekly MACD has crossed downward
- Weekly oscillators all show negative divergence
- Michael Pitre’s daily chart is on sell signals
- spydercrusher.com is bearish
- Dashboard is on sell signal
- Informedtrader.com is on 100% cash
- QE2 is ending in June
- Nasdaq bullish percentage 10 day average has crossed down since early May
Then of course you have the whole enchilada of macro economic woes: unemployment, housing, inflation, ISM index, national debt, etc.
Today the market bounced and may retest the high. I added some TZA, and entered some CTSH June bearish call spread. I’m only about 10% short, so I have plenty of powders left if the markets were to retest the old high. As bearish as I am, I am not expecting a big down. Why? In the face of QE2 POMO, even a sideway movement is respectable in the eyes of the bears.