Full episode: Market Call Tonight for Friday, May 10, 2019
Jon Vialoux, research analyst and portfolio manager at CastleMoore
Focus: Technical analysis and seasonal investing
Let the rhetoric pertaining to “sell in May and go away” begin. Google searches for the investment adage spike at this time of year as investors seek the truth to this well-known strategy. The strategy assumes that equity markets move lower from the end of April to the end of October. Therefore, investors should avoid equity market participation during this period. On the surface the strategy sounds simple, but is it really justified?
Looking at the S&P 500, the large-cap benchmark has averaged a gain of 1.49 per cent between the start of May and the end of October since 1950. Positive results have been achieved in 64 per cent of periods. Compare this to the 6.99 per cent average gain between the start of November and the end of April, the better opportunity to be aggressive in stocks is apparent. Positive results have been achieved in 78 per cent of seasonally strong periods, including this past period, which begun with an abrupt downturn. But while clear that the better half of the year for stocks has typically been realized in the six months ending in April, the result of favourable fund flows and positive fundamental catalysts, the other half of the year is by no means a losing bet.
The Sell In May proposition fails to deliver alpha over a simple buy-and-hold approach. An investment of $10,000 in the S&P 500 Index 25 years ago would be worth $87,719 as of the end of 2018, far surpassing the Sell In May portfolio that grew to $53,332. The latter entails holding the broad market benchmark for only six months of the year. The annual return of the buy-and-hold approach has matched or outperformed the Sell In May strategy in 19 of the past 25 years, with only the returns surrounding the last two recessions providing a benefit to the cash-heavy mandate. The analysis incorporates the impact of dividends, but excluded from the calculation is commissions and any tax consequences that would accompany selling positons at the end of April and buying back in October. Incorporating the negative impact would further degrade the return of the Sell in May approach as the compounding effect is reduced.
CME GROUP (CME.O)
While the summer is not necessarily a negative period for markets, it’s known for its volatility, particularly through the third quarter as fundamental catalysts dwindle. CME Group, operator of financial exchanges dealing in futures and options, is typically the beneficiary of equity market volatility as investors trade more actively in the products for speculating and hedging purposes. Analysis of CME Group Inc. shows that a buy date of May 11 and a sell date of Oct. 6 has resulted in a geometric average return of 10.69 per cent above the benchmark rate of the S&P 500 Total Return Index over the past 15 years. This seasonal timeframe has shown positive results compared to the benchmark in 14 of those periods.
ISHARES EXPANDED TECH-SOFTWARE SECTOR ETF (IGV)
This ETF holds a basket of software equities trading on North American exchanges, including Microsoft, Oracle and Salesforce. The industry has been benefitting from positive year-over-year revenue growth and the more defensive characteristics of these technology companies tends to provide an ideal place to invest during the volatile summer period. Analysis of the S&P North American Technology Software Index shows that a buy date of July 31 and a sell date of Nov. 8 has resulted in a geometric average return of 4.2 per cent above the benchmark rate of the S&P 500 Total Return Index over the past 20 years. This seasonal timeframe has shown positive results compared to the benchmark in 17 of those periods.
LOCKHEED MARTIN (LMT.N)
During the summer, investors can choose to be defensive by investing in staples, REITs, health care and bonds, or they can invest in defence. Analysis of Lockheed Martin shows that a buy date of April 11 and a sell date of Aug. 28 has resulted in a geometric average return of 6.25 per cent above the benchmark rate of the S&P 500 Total Return Index over the past 20 years. This seasonal timeframe has shown positive results compared to the benchmark in 16 of those periods. The company shows strong year-over-year revenue and net income growth as it benefits from above average U.S. defence spending.
PAST PICKS: FEB. 8, 2019
- Then: $42.81
- Now: $42.76
- Return: -0.1%
- Total return: 1%
ISHARES MSCI EMERGING MARKETS INDEX ETF (EEM)
- Then: $42.16
- Now: $41.98
- Return: -0.4%
- Total return: -0.4%
Total return average: 0.2%