Sell In May and Go Away?

It is almost the end of April and the month of May is upon us. Many of you may have heard of famous term ‘Sell in May and Go Away’ which is based on the markets pattern of declining in the Month of May. How often does this patterns occur and would it likely happen this May 2011.

As we know, the market cannot be predicted to an exact science as stock prices are driven by emotions and random news events. We can however, look at the PROBABILITY of it happening and keep a cautious eye out. If you look at the last 20 years 1991-2010, the market declined in the month of May in 1993, 1996, 1998, 1999, 2006, 2008 and 2010. All other years, the month of may ended POSITIVE. This means that based on the last 20 years, the probability is 35% that it might happen.

So, could it happen this year? Well, so far the earnings report from companies reporting Q1 earnings has been better than expected with 75% of companies beating forecasts. This is an extract from a CNBC report on:

Standard and Poor’s analyst Samuel Stovall has been analyzing the impact of the better earnings reports on S&P estimates, and he also says the sell off in February and March may have made the potential for a market decline less likely now. He also said instead of following the old adage, “sell in May and go away,” investors should rotate the sectors they hold to more defensive areas.

“I think since we had the pull back from Feb. 22 to March 16, I think that sort of delays when we might experience a sell off or consolidating patterns…I think also because corporate earnings are coming in better-than-expected that too could delay it and also just based on where we are in the presidential cycle,” he said.

“I happen to think the market’s going to work its way higher. May is not a bad month. The average is a gain of 0.3 percent, versus the 0.6 percent for the average month, and while the return is less in May, than other months, the volatility is also less,” he said.

In a note Monday, he pointed out that the defensive health care and consumer staples sectors are the ones that typically outperform in May through October, with gains of 5 percent and 4.8 percent respectively. During that time, the S&P 500 averages a gain of just under 1.5 percent.

The consumer discretionary, financials, tech and materials do better in November through April historically.
As far as the quarter’s earnings, companies are doing 2.6 percent better than expected by Wall Street analysts, said Stovall.

So, it looks like May may (no pun intended) not be as scary as what the rumour makes it out to be. In the meantime, I just put GOOGLE on my watchlist of stocks to buy. My estimated conservative intrinsic value is $619, while the stock is selling for $525. However, it is currently on a downtrend below the 200 day moving average and am hoping it will go down to the next support line at $500 and maybe even $450 before buying.