Sell in May and Go Away?

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There is a famous saying in the stock market – “Sell in May and Go Away”.

If you look at long term stock market returns, theyup being about 8% per year. But these returns don’t happen consistently throughout the year.

Most of the actual upward price movement of the stock market happens between the months of November and May. On average, the return during these 7 winter months is 7.4% per year. There is a seasonal pattern to stock market returns.

During the summer months, everything changes. The return from May to October is a paltry 0.73% per year. And not only are the returns low – there is a truly massive amount of downside risk. The worst drops happen during the summer months, from May to late October.

Sell in May 2012 and Go Away 
You can capture almost all of the gains and avoid most of the losses just by selling your stock market positions in May, and then buying stocks back in October or November. So the phrase, “Sell in May and go away” is good advice if you like to hold onto your money and sleep soundly at night.

“Sell in May” seems like very good advice for this May. Every smart investor I talk to is glad the stock market had a nice winter rally (a winter rally is just what we predicted!) But we are very concerned for several reasons and here's why:

• European Debt Crisis making news again
• Fed says no QE boost to stock market this summer
• Bullish Sentiment near 5 year highs
• Corporate Profits Falling: My proprietary Profits indicator flashing warning on falling profits
• Nobody’s Worried: VIX (volatility index) at lowest level since 2008
• Debt Ceiling Debate: in the news again (20% drop last time!)

Any 2 or 3 of these negatives would be reason enough to be worried...but this list has SEVEN good reasons to be worried. The very fact that this list is so long is another cause for worry! So I'm telling you now, the Summer of 2012 probably won’t be good for stocks.

But after you sell your stocks on May 1st, what do you do? You could just park your money in cash. But why not put your money to work? Here’s a tip: Not everything will go down this summer.

How to put your money to work in Summer 2012
Every financial guru tells you It’s smart to keep your money working for you. But where should you put your money during the summer of 2012? Well, there are market trends that will give you a good indication on which markets could go up in the future. You probably know this by now, but most people trade the wrong markets, in the wrong way.

What does this mean?

It means that instead of just only trying to follow a few stocks that go up, you might want to consider that it’s much better for your account to be a trend trader–that means that you look for the strongest market trends and hop on those. To do this, you scan many markets, and look for strong, one-way moves in those markets. It's not really that hard if you open your eyes to more than the few stocks you've been following. Just broaden your horizons and let the market tell you which want to go up.

Our own Trend Following 101 ETF system is long the stock market today. But it’s obvious the system won’t be long the stock market in May. We're going to sell its stock position. And it looks like the system will buy bonds. To be 100% clear, I don’t know yet what the system will buy. The month isn’t over, and the data isn’t all in yet. But right now, the system is leaning to buying bonds in May. Possible bond trades are popping up, and they all look pretty good.

These bond ETFs pop up as possible investments for May when the system runs on the data through April 11th:

1. LQD: iBoxx $ Investment Grade Corporate Bond Fund
2. BWX: SPDR Barclays Capital International Treasury Bond ETF
3. WIP: SPDR DB International Government Inflation Protected Bond ETF
4. TIP: iShares Barclays TIPS Bond
5. PCY: Emerging Markets Sovereign Debt Portfolio
6. HYG: iShares iBoxx High Yield Corporate Bond Fund

These ETFs are close to pushing the stock market ETFs aside – and it’s only the middle of the month!  I can’t yet know which of these 6 ETFs will end up displacing the 4 ETFs we have on this month. It’s too early to tell. There might be some serious market movement between today and May 1st. But the system will change out ETFs on May 1st, 2012, just when the worst times for the stock market usually begin.

Part of the reason this system does so well is that it avoids those down times of the market. Last August – when the stock market was losing 20% every few days, the EZ ETF system actually made money. It didn’t make a fortune, but then it didn’t have to make that much and that's the beauty of the system–it makes money by not losing 20%. From July 22nd to August 8th, the stock market lost almost 20%. During those same few weeks, the EZ ETF system gained about 2%. That’s not a huge gain, but it sure beats losing 20%!

And that's exactly why you should consider trend following as an investment strategy. You open up your options and you make money by not losing money. You don’t have much time to decide. May 1st is only 12 trading days away. You need to do something with your money to keep it safe AND keep it working for you.

Your Friend in the Trend,

Mike Sankowski

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