My 2 Cents On ‘Sell In May’

I can’t remember seeing more articles on a market axiom like ‘Sell in May, and go away’. I think the media picked up on it and ran with the story, and that caused lots of investment firms to feel the need to comment on it - much like I’m doing right now.

I didn’t go back and look at the history of how successful this strategy is. I know that there have been plenty of times when it worked well, and plenty of times it probably didn’t. It’s true there is often a pullback in the market during the summer, but there are also frequent pullbacks in the spring, the fall, etc. So really it call comes down to how well you can time the market. And calling tops in the market is probably one of the most difficult endeavors in the investment industry.

My thoughts today look at the current sentiment backdrop in the market, and whether I think investor psychology lends itself to a short- or intermediate-term top at this juncture. By that I mean if all the investor surveys and indicators show that investors are extremely bullish right now, that often leads to complacency and precedes a market selloff. But I am not really seeing that right now.

First, I like to look at the American Assoc. of Indiv. Investors (AAII) survey. I look to see the percentage differential between bulls and bears. With the market making new all-time highs, you would think bulls would be swamping bears. But that is not the case. Currently, bears in the survey have exceeded bulls in each of the last four weeks. Not too much complacency there.

Second, another poll I follow is the Ticker Sense blogger poll. Guess what? More bears than bulls in each of the last four weeks again.

A couple of other sentiment indicators are the NAAIM survey, which recently hit its lowest levels since last November. And the CNN Money Fear & Greed Index, which hit a one-year low last week.

I know these surveys may seem anecdotal by some, but in my experience it pays to be more worried about investor complacency and the prospect for an outsized selloff when these indicators are flashing extreme bullishness. And that is just not the case right now.

This whole year - so far - we have seen only mild pullback with underinvested portfolio managers more than happy to quickly step in and buy and and all dips in the market. Sure, one day this strategy will backfire on them. But for the short-term it looks to me like we are in store for more of the same. The market seems to be successfully climbing the proverbial ‘wall of worry’ and I would give the odds to that continuing for the time being. I am not ruling out the possibility of a summer selloff, but I would probably place my bets more in the July-August time-frame if I had to pinned down as opposed to selling today when the market is breaking out to fresh new highs. Just my 2 cents on the ‘Sell in May’ strategy and the odds of success for 2013.

Good luck and happy trading!