Despite the title, session 101 is not about the weather or climate change. It is about that old market saw, “Sell in May and go away”…a reference to a quirky market seasonal pattern showing, on average, a greater propensity for market profits in the winter vs. less profits in the summer months. Mark Hulbert (The Hulbert Financial Digest) commented on this Tuesday April 9th (“Should you sell in April and go away? Opinion: Some advisors are getting a head start this year.”). Hulbert points out that in the entire history of the Dow Jones Industrial Average (since 1896), the November thru April time period has had an average gain of 5.2% while May thru October has averaged 1.7% (with significantly greater volatility). The implication is that if you are an adept trader, you can pull out before the summer doldrums and re-buy on a dip, drastically improving your returns. Problem is most people are not adept traders and, of course there are those May/ November periods like we had in 2013 (to get back in November 1st you would have had to pay up 11%). Also, if you just held on your combined return would have been nearly 7% (almost a double every 10 years) without the added friction of transaction costs, much higher commissions than exist now (+ no ETFs for most of the period) and much wider bid / ask spreads. BTW, since 1950, the overall stats on the Dow Jones Industrial’s return is more like 7.8%. The message is keep it simple…just hang in there. Unfortunately, sell in May or April is just noise, confusing what real investing is all about.
A gift to the Media
The week of April 7th and the carnage in the high momentum sector of the market (high flying tech, biotech and social media) was a gift to the media. It got their precious bodily fluids pumping. By the end of the week you had CNBC contributor sages, Art Cashin (Economy may be beginning to sputter) and Rick Santelli (recessionary pressures building), calling out the flight to safety exemplified by the drop in the 10-year U.S. Treasury yield to 2.62% as a harbinger of economic weakness, disinflation…maybe the dreaded “R” word. This might have been a bit premature in light of subsequent economic releases (retail sales, new claims for unemployment benefits, the Philly Fed Beige Book and consumer confidence).
I believe the 2.62% reading on the 10-year (it subsequently trade at 2.58% with the 30-year below 3.5%) was purely a manifestation of the fear and distrust that has been pervasive in the market since the collapse of 2008.
It is all about FEAR!
I have a long-time friend (62 years), who like me over the years, looked for ways to make a killing in the market. We took outsized positions in speculative names and routinely ended up losing our fannies. Subsequently, I changed my ways, but still devote a portion of my portfolio to small-cap speculation. Unlike me, the market was not the center of my friend’s world, he made other investments in real estate, income-producing real estate in crummy neighborhoods (the only kind he could afford). He used the cash flows to fund his creative interests. Fast forward thirty years, that crummy neighborhood has become gentrified and my friend has a problem, where to invest the bundle he will make when he liquidates the properties. It is a problem, because he has become so traumatized by the events of 2008/2009 he is afraid to put the money in the bank, or give it to someone else to manage (thank you Bernard Madoff). I am told and believe to be true that there are lots of “boomers” out there like my friend, scared to death of investing and unable to know who to trust to invest with. Ergo, there is a big ‘fear’ demand for Treasuries.
The Takeaway
Corrections in bull markets are normal, but secular bull markets normally do not end in periods of high skepticism and fear. I believe, accept for the speculative fringe that is currently being pummeled, we are still in a period of fear and skepticism…a healthy sign that this bull has further to run.
What do you think?
The information presented in kortsessions.com represents my own opinions and does not contain recommendations for any particular investment or securities. I may, from time to time, mention certain securities for illustrative purpose, names where I personally hold positions. These are not meant to be construed as recommendations to BUY or SELL. All investments and strategies should be undertaken only after careful consideration of suitability based on the risks, tolerance for risk and personal financial situation.