If we see higher risk assets further over-valued, do not chase the move, but rather sell into price ...
This May, Don’t Go Away
06/04/2008 12:00 am EST
John Bollinger, editor of Capital Growth Letter, says the presidential election will circumvent the usual seasonal stock patterns, while commodities should continue higher.
There is always a lot of discussion at this time of year regarding the adage "sell in May and go away." The idea reflects long-term studies that suggest that most of the US stock market's gains are recorded in the September/October to May/June periods and that the time of highest risk is the May/June through September/October period.
We have found that one can earn a reasonable rate of return by entering the market in the fall and holding the position though June and into July. We have also found that August, September and October are the three months with the highest risk and that while the important lows used to come in September, the most important buying opportunities have moved later into the year.
However, a deeper look reveals that not all years are created equal. It turns out that the four-year, or Presidential, cycle has a substantial impact on this annual seasonal pattern. The bottom line is that the “sell in May” theme works in the three years after the election, but not in the election year itself. For now, the bottom line is that we won't be hewing to the “exit in May” advice this year.
[Meanwhile,] we find the continuing rally in short-term interest rates extremely significant. If the markets and economies are in fact on the mend as we have argued, then short-term rates—at least market-set rates—should be rising, and they are. The lows for the short-term rate index, came in mid-March. A period of initial recovery was followed by a consolidation that led to the current rally.
Clearly the flight to quality that caused the unprecedented decline in short-term rates is behind us and we are well into the recovery phase. We now expect to see the idea of a recession abandoned, albeit slowly. We never thought that we'd see the two quarters of back-to-back negative GDP numbers that constitute the [most widely accepted] definition of a recession, and now we suspect that we won't even see one quarter of negative growth.
Yet the bears are screaming, “recession, recession, recession…” Yes, we have problems. No, they won't overwhelm us. Expect continued recovery and strong growth numbers later in the year.
After a long period of advance, industrial commodities have entered a consolidation period. The question now is whether the turn higher in the economy will be strong enough not only to keep commodity prices at consolidation levels, but drive them higher. We fear that the answer is yes and that inflation has been deeply rooted in the economy in the last couple of years. Essentially we think that the odds [are good] for higher commodity prices.
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