Doldrum Time

“Sell in May and go away.” This homely adage seems to be on its way to yet another validation in 2011. It has had an undue share my attention as well, given the surplus mental bandwidth that besets those of us in a downshifted career mode. Careful readers will have noted my inclination to anticipate this seasonal tendency and raise a little cash back on April 4. That idea that certain times of year might might be more or less kind to investors than others is not something that I have found particularly compelling, with the possible exception of that abatement of year-end tax loss selling the old timers called the Santa Claus rally. That it seemed more about the pundits’ need to not ever get caught without something to yammer about, however, did not mean that there might not be at least a little something tactically useful to it. How many times have we gotten a few months into the year with a YTD return running well ahead of our long-term objective, and it dawned on us that it would probably be a good idea to “call it a year”? That is, go to cash, book that return, and take it easy for the rest of the year while we wait until perhaps year end tax selling season to re-invest. Of course we never did. But more often than I would like to remember, there were times when on a “heartburn adjusted” rate of return basis, “Sell in May...” (or thereabouts) would have been not only health enhancing but career enhancing as well.

There certainly seems to be something of a calendar-based influence at work. While apparently “Sell in May...” has been around for a long time in the U.K., it was first noted in the U.S. in The Stock Trader’s Almanac in 1986. It was noted at that time that since 1950, stocks (as measured by an index) held from May 1 to October 31 actually produced, on average, a slight negative return, while stocks held for the other six months were up some eighteen-fold. More recently, we see that in the last ten years, there have only been two when “selling in May” did not turn out to be a good idea. (That 2003 and 2009 were exceptions is no surprise at all, in that in both cases the preceding March were major Market bottoms. And even in those years of massive decompression, there was a two month pullback commencing in mid June 2003, and in 2009 it backtracked from June 1 until the morning after Intel kicked off Q2 earnings season.) Of course, there are also studies pointing to the opposite conclusion, that being out of the Market at any particular time based on past averages, is a fool’s errand. Our memories, however badly the passage of time has abraded their reliability, inform us of plenty of times between June and October when it would have hurt like hell to be out of the Market. Last year, for example, “Selling in May” looked really smart for four whole months, but on September 1 the Market went on a tear that by November 1 had blown through the April highs and then some.

So what are we to make of this saying? In my estimation, there is clearly something to it. At very least, it seems to be a self-fulfilling prophecy, a reflection of the actions of speculators based not on any fundamental factors but on the prospect of what other speculators might do, that can be counted on to more often than not negatively affect stock prices in the May/June timeframe. But just as we know, if we are honest in our assessment of the human condition, that stereotypes do not emerge wholly out of thin air, (and that habitually defaulting to stereotyping and other mental shortcuts will impoverish us in more ways than we know) there is at least a shred of substance to this notion. Given the degree to which fundamental data embodied in earnings announcements gets concentrated around a few relatively thin slices of the calendar, how surprised should we be that when the data thins out, an informational dead zone will tend to occur? I suspect that, except in years like 2003 and 2009, when a very low tide of sentiment was just starting to rush back in, an informational dead patch starts to take hold in May and linger into July. Once prior YE and Q1 earnings are largely out of the way, but the Q2 reports are well out in time and it is still too early for that shift in focus from current year to next year’s estimate, a bit of a vacuum sets in. The reasons for the speculative buyer-at-the-margin to step up and play thin out, and so the siren song of the fear mongers becomes harder to disregard. The flow of fundamental data recedes, quite naturally enough, and the data-hungry among us become more susceptible to its junk food equivalent.

This year, we find ourselves feted with a buffet of “double-dip”, slowdown, and of the fiscal travails of inconsequential nation states that have been decaying into oblivion for longer than anyone can remember. Are we supposed to be surprised that the uncertainty posed by a literally quite rattled Japanese economy caused a few thousand (at least) industrial decision makers to risk erring on the side of caution? (There was no way of knowing how bad the potential parts shortages would be until they were over, and now they are pretty much over.) Over the past six-plus weeks, a tradable pull-back seems to have been orchestrated and, one supposes, harvested by its perpetrators. I strongly suspect that while it did turn out to be a good idea to be “less invested” going into May, the “six losing weeks” have heard so much about of late is not on its way to a record tying eight weeks (something that has only happened three times). The Bear case is looking threadbare, strong enough to hold its own during this doldrum season, but a spent force when compared with prospective earnings that will start to come into focus in a couple more weeks.

“Doldrums” is probably the most apt way to think about this time of year. This term derives from an area of the Atlantic, a low latitude zone with a marked tendency to turn calm. Somehow, for perfectly natural reasons, this region (now know as the Inter-tropical Convergence Zone) does not enjoy the generally fair and predictable breezes that define so much of the Atlantic. Instead, it tends to prolonged bouts of lassitude punctuated by severe squalls. This was a very serious matter for sailors, and, when sail power was what held together the then preeminent transatlantic economy, for lots of others, too. To be becalmed was a dispiriting thing, at the least, so sailors came to refer this patch of torpor within an otherwise more amenable natural order as the doldrums. This did not make the doldrums a place to be avoided at all costs, but it certainly meant taking its perverse tendencies into consideration. The same can be said for this doldrum time of year.

“Sell in May” is a useful aphorism, a statement that expresses a belief that is quite often but not invariably true. This is as opposed to an axiom, which is more like a law which it is presumed that nature, or some other agent, will enforce. Such adages are like the Proverbs in the Bible, a collection of timelessly wise sayings that one would profit by heeding, as opposed to the conditional divine promises that the uninformed reader might take them to be. If the months leading up to May are characterized by the sort of high and rising spirits that enlarge equity valuations, there will probably be a doldrum-like stretch of time that facilitates a reversion toward a more normal mood and valuation. Of course, if May 1 finds us just a matter of weeks from what felt like a financial near death experience, we probably find ourselves sailing through that seasonal dead patch as if it were barely there, but that is usually not going to be the case. 2010 utterly fit the mold until the announcement of QE2 sent the Bears scurrying. In 2011, the Market did not exactly reach May in a state of headlong euphoria, having undergone a healthy correction in the Feb/March timeframe. Nonetheless, the doldrum season arrived as if right on cue. It has been more notable for its duration (that “...down weeks in a row” refrain we kept hearing) than any sort of ferocity. And all through this interlude wherein Fear seems to have sent Greed on a sabbatical, the IPO market has reminded us that Greed (and its co-dependent handmaiden Credulity) is indeed alive and well. Expect it to reappear as the summer progresses and the earning releases of July make it plain that global economic growth continues unabated.