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‘Stay away in May…’ for equities; So far, so true

By Total Trader | Published: 8 August 2011

In the U.K., the saying rhymes: “Sell in May and go away. Stay away till St. Leger’s Day.” It infers investors exit their stock positions in May and enter again from mid September onwards, marked by the Saint Leger’s horse race celebrating the climax of the flat racing season.

Academics debate the benefit of such a strategy, arguing that taking into account transaction costs and taxes the benefits are negligible. What appears more important is broader economic sentiment and the investment cycle. One thing is a given – remaining in cash over these periods lowers volatility and appeases investors nerves. One common explanation, among many, is that many investors and market pros leave on vacation over this period thereby lowering trading volumes which drag on the market.  Chart 1 illustrates the stock market performance of the European Stoxx 600 since 2006 were we highlight the laggard performance from the start May to Mid September.

Two periods are worth highlighting being 2007 and 2009. 2007 represented the pre-crisis asset bubble and 2009 was the post the financial crisis stimulus driven stock market recovery. Interestingly the maxim appears sound; however, we admit the anecdotal nature of the evidence.

The Sky is Falling!
Recently stock markets have been inundated with negative news flow from disappointing ISM numbers to stifling US GDP revisions. All this being compounded to debt concerns in both Europe and the U.S. Italian debt and Spanish banks remain a concern with estimates surfacing that if both countries were to be bailed out it would require in excess of a whopping EUR 460bn. Further, the aversion in the market is highlighted by gold’s recent celebrity as shown below.

 

Hedging and Scotch!
Our twist on the age old adage would just be ‘Stay away in May…’  as we understand that investors buy companies/stocks for many reasons and advocate that for those investors that prefer holding positions over these periods, one option may be to hedge portfolios using the likes of gold, index trackers or even the VIX (Volatility Index).

We are aware that staying away may negate investors from earning potential returns during volatile summer upswings – for those market timing geniuses. But for us mere mortals hedging your portfolio may provide some level of comfort. And to appease those nerves… a well aged scotch, or two!

Source: www.tradingfloor.com

 

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This entry was posted in General and tagged equities, Europe, European Stoxx, Financial Crisis, investment cycle, Stock Market, UK, US, Vix, Volatility Index. Bookmark the permalink. Both comments and trackbacks are currently closed.
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