Chris Kuflik - ScotiaMcLeod Montreal

With summer fast approaching, we are once again reminded of the old market adage "Sell in May and go away," and the uncanny historical bias with which it is substantiated. Should you sell in May to protect your gains and is this a sound risk control strategy?

“Sell in May and go away” is the premise behind the market seasonality study conducted by the Stock Trader's Almanac, which is published by Yale Hirsch. The Almanac is a fantastic source of information on the stock market in the United States.  The premise of their "Market Seasonality" study is essentially that, historically speaking, the market performs far better during the November through April time period than it does from May through October. On its own, that isn't a particularly profound statement or a particularly bold assertion, but when one examines the magnitude with which this effect has been chronicled over the years it becomes a very significant underpinning indeed. Consider this; if you were to invest $10,000 in the Dow Jones on May 1st and sell it on October 31st each year since 1950, you would have lost money over the last 61 years! Put another way, the entire growth of the Dow Industrials since 1950 has effectively come in the "good" six months of the year – November through April. The Toronto Stock Exchange also follows these same seasonality patterns. Conjecture doesn’t mature into adage without basis in reality and market seasonality is just such an example as it has an impressive trend in terms of magnitude, consistency and longevity.

You should note that over the years there have been down periods in the seasonally strong stretch, and up periods in the seasonally down period, but what I am referring to is simply a historical bias. Yes, this strategy does have a very strong historical bias to it, but it is not a "be all, end all" means of risk management for one’s portfolio.

While I was preparing my notes for an interview with Malcolm Morrison, a Canadian Press reporter, this week, I was reminded of the “Sell in May and Go Away” adage in an email from an astute client. (Please click here to view the article). With the market’s declines that we have witnessed this week, my client was inquiring if we should heed the advice of the adage. My response to both he and Malcolm, was the following: The TSX, due to its heavy weighting in commodity stocks was priced for perfection until recently. As the prices for underlying commodities rose, some in part, due to a risk premium for global economic and political events, commodity equities shared in some of the ride. Silver, the best example of this speculative fervour, experienced a parabolic price increase this year. This was primarily due to speculators pushing prices of silver ETFs. This week the price of silver has declined approximately 30%!

While the markets as a whole are expensive and overbought, some sectors and individual equities remain fairly priced or represent good value. Despite much negative economic news globally, corporate earnings have been good in the US so far this earnings season. The majority of US corporations have beaten analyst expectations. This has led to many investors ignoring much of the bad economic news and has contributed to the overbought conditions that can currently be seen in the US markets today. Canadian corporate earnings, which have recently begun, have been a mixed bag thus far.  Earnings are paramount for higher markets.

Our focus remains on those equities and sectors where earnings continue to grow and where we can get paid dividends to wait. We remain cognizant of market conditions and earnings as we enter the seasonally weak stretch. We do not view the adage of “Sell in May and Go Away” as a method of risk control. We will continue to keep a close eye on the market right now in order to adapt to any potential changes as they arise to protect our portfolios.

Please feel free to share this article with someone you feel could benefit from its contents.

Chris Kuflik

Associate Director, Wealth Management

Wealth Advisor

514-287-2931

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Visit our website at www.chriskwealth.com

* Data in this months Newsletter comes from calculations the Author has done himself. All calculations and findings are believed to be reliable based on the data provided. Past performance is not indicative of future performance.

 This publication is intended only to convey information. It is not to be construed as an investment guide or as an offer or solicitation of an offer to buy or sell any of the securities mentioned in it. The author is an employee of ScotiaMcLeod, a division of Scotia Capital Inc. ("SCI"), but the data selection, analysis and views expressed herein are solely those of the author and not those of SCI. The author has taken all usual and reasonable precautions to determine that the information contained in this publication has been obtained from sources believed to be reliable and that the procedures used to summarize and analyze such information are based on approved practices and principles in the investment industry. However, the market forces underlying investment value are subject to sudden and dramatic changes and data availability varies from one moment to the next. Consequently, neither the author nor SCI can make any warranty as to the accuracy or completeness of information, analysis or views contained in this publication or their usefulness or suitability in any particular circumstance. You should not undertake any investment or portfolio assessment or other transaction on the basis of this publication, but should first consult your investment advisor, who can assess all relevant particulars of any proposed investment or transaction. SCI and the author accept no liability of whatsoever kind for any damages or losses incurred by you as a result of reliance upon or use of this publication in contravention of this notice.

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