Sunday, March 10, 2013

Repeat of Sell in May Pattern?

Since the 2009 bottom, the market has corrected each year around the month of May. With the Dow at all time highs, it may be a good call to assume the pattern will repeat itself in 2013.  If a decline happens around May again, it will be the fourth year in a row.

The case for "sell in May" is that many traders will go on vacation during the summer, returning in September.  Thus, there is little buying pressure during the summer which results in a decline in the market.

However, 2013 may be different this year for a several reason:
  • Rotation from bonds to stocks. Investors seem more willing to take more risk due to the low interest rates for fixed income.    There has been a net outflow from fixed income and a net inflow into equities.
  • Sideline money being invested.  Retail investors are putting money back into the market after four years for taking money out.   Either confidence is growing or people don't want to miss the next rally.
  • Excess funds from 2012 tax gain selling.  Due to the expected expiration of the Bush tax cuts in 2012 and unknown 2013 tax rates, there was significant selling of appreciated assets to have the gains taxed at a known and lower tax rate.  The money from the sales will likely be reinvested.
  • On the negative side, there are the usual suspects:
  • Sovereign debt issues in Europe. Someday Greece, Spain, Italy or other EU country will default.  Just a matter of time.
  • Debt limit brinkmanship.   We're just a couple weeks away from a technical default by the U.S. with the President and Congress no where close to a solution.
  • Sequester impact.  The sequester did not have an immediate impact on the economy.  However, the rest of 2013, the spending cuts will affect the economy.
  • At this point, I think "sell in May" is the higher probability scenario.  However, it may be better to go against me since my success rate at these types of predictions is less than 50% :-)

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    This is not financial or investing advice. Please consult a professional advisor.

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