In Search of the Perfect Investment

Sell in May and Go Away is an old stock market aphorism. It hat reflects that stocks usually do poorly between May and October. Hence it ‘s better to be out of the market during this six months.. The strategy is to sell in May and buy back around Halloween. Wikipedia calls it The Halloween Indicator and writes:

Though this seasonality is often mentioned informally, it has largely been ignored in academic circles (perhaps being assumed to be a mere superstition). Nonetheless analysis by Bouman and Jacobsen (2002) shows that the effect has indeed occurred in 36 out of 37 countries examined, and since the 17th century (1694) in the United Kingdom; it is strongest in Europe.

Some years, like 1999, defied the rule. For example, between end-April and end-October 1999, stocks rose by 20% (but crashed the following year).

This year I suspect it will make sense to be out now (earlier than May) and back again in Halloween. I have two basic reasons:

1. Markets have a had a nice run this year, and have turned squirrely of late:

2. The economy is turning sour, and looks awful for the second half. Reasons: sluggish employment growth in the U.S.  Awful austerity in Europe, tipping many European countries into recession. (Spain is already there.) And China is slowing.

The best explanation of the Second-Half Recession thesis is in a four-part series by economist Dr Gary Shilling on Bloomberg. Click here.

Shilling writes: I laid out the reasons why the U.S. economy, despite current strong consumer spending and the recent euphoria of investors over stocks, will weaken into a recession as the year progresses, led by renewed consumer retrenchment.

VectorVest writes:

Given an insidious sequence of up and down days, I haven’t been able to make any money going either long or short. So it’s time to take a break and see where this market wants to go. My bet is that it probably will go down. So be patient and be cautious. With three yellow lights and an UpDn situation:

Prudent Investors should be cautious when buying stocks at this time.

Aggressive Investors and Traders should play the market up or down as it develops.

I got out of Apple once it dropped 10% from its $644 high. I no longer read the positive buzz on Apple I used to. The press and the blogs are full of stories on slowing iPhone sales and Apple being sued by everyone and their mother. Fundamentally it’s a great company, though, wiithout Steve, it’s not the great company it once was. Let Apple stock come back some. I might get interested at a lower price. Meantime, I’m not buying in front of Tuesday evening earnings. That may be wrong. But all indications point to disappointing growth for the latest quarter.

Investors Business Daily publishes weekly it IBD 50. Here are the top 15. IBM says the IBD 50 is a computer-generated watch list of the market’s leading growth stocks. The P/Es of these stocks are pretty high, with — curiously — the cheapest being Apple, and the second lowest being Spirit Airlines. I don’t own any of these stocks.

My preference is to stay with what they now call “defensive” stocks — relatively high-paying dividend stocks like AGNC and NLY.

You can’t go wrong with a Bill Clinton joke.

Harry Newton who is pleased the north-east finally got some rain this weekend.