‘Sell in May and go away’ idea haunts stocks’ spring rally

This article was originally on a blog post platform and may be missing photos, graphics or links. See About archive blog posts.

For some Wall Street denizens, the idea of a May Day march is a time-honored tradition: March right out of the stock market on May 1 and don’t come back until Nov. 1.

This is the famed ‘sell in May and go away’ investment strategy. It’s based on the market’s historical tendency to post much bigger gains in the six-month period of Nov. 1 to April 30 than in the other half of the year.

On average over the last 58 years, the Dow Jones industrial average rose 7.6% from Nov. 1 to April 30, according to the Stock Trader’s Almanac.

The average gain in the May 1-to-Oct. 31 period, by contrast, was a mere 0.6%, a number dragged down by the many steep sell-offs in the period over the years.

Obviously, the strategy doesn’t always work. Nor is it practical for most investors who still have long-term time horizons. But this time around, market bears believe the seasonal issue is at least a good reason to eschew chasing the spring rally.

Joe Saluzzi, a principal at Themis Trading in Chatham, N.J., says investors ought to do a reality check: The rally has lifted key market indexes between 25% and 50% since March 9, ‘But ask yourself, what has changed?’ he says.

He concedes that some economic indicators have been less dire than in preceding months, but says there is no sign that a true recovery is at hand.

Perhaps more worrisome, Saluzzi says, is the mindset of many of the buyers whom he sees pushing stocks higher. ‘The problem is that this now is a momentum market,’ he says. ‘The money coming in is from aggressive traders, not the buy-and-hold investor.’

Momentum traders don’t care which way the market is moving, he notes; they’ve been buying over the last eight weeks because the trend has been up, but they’ll be ‘shorting’ stocks as soon as the trend reverses, Saluzzi says.

And when it does, ‘I see nothing to tell me that we aren’t going to retest the market lows of March, or even go lower than that,’ he said. . . .

Peter Boockvar, strategist at investment firm Miller Tabak & Co. in New York, also remains in the camp that sees this rally as just another bounce in a longer-term bear market. The economy, Boockvar says, ‘is still facing the headwinds of falling house prices and the effects of deleveraging by consumers. It’s going to be years before we see normal economic times again.’ With that backdrop, he says, chasing rallies is inviting heartbreak.

To market bulls, however, the case for more to come in this advance is both fundamental and technical.

Fundamentally, the argument goes, stocks were priced for Armageddon eight weeks ago, and they’re still too cheap relative to many companies’ future earnings potential -- even in a modest 2010 recovery.

Steve Leuthold, a veteran investor and head of the Leuthold Group in Minneapolis, thinks the Standard & Poor’s 500 index could reach 1,100 by year’s end. That would be a 26% gain from here, but still would be a long way from the index’s all-time high of 1,565 reached in October 2007.

As for the technicals, precisely because so many shell-shocked investors are sitting in cash and waiting for something worse to happen to the market, the real surprise would be if it didn’t.

‘Because of the money on the sidelines and the negative sentiment, it seems to us that there’s a lot more room for upside here,’ said Andy Engel, a senior analyst at Leuthold.

Even Boockvar concedes that stocks in the near term have a powerful ally in the Federal Reserve, which is pumping literally trillions of dollars into the financial system.

‘I’ve been bearish, but I acknowledge the possibility of the market going higher because the Fed is throwing money from the sky,’ he said.

-- Tom Petruno