Market Commentary - 5.2.13

Is it Time to Sell in May and Go Away?

There is a common trading proverb that warns investors to annually sell their stocks in May, in order to avoid summer market weakness, and repurchase in November. With April coming to an end, we want to examine this market adage for accuracy and, if proven true, discuss ways to minimize its effect on investment portfolios.

Let's start with the facts about this strategy, referred to by most investors as "sell in May and go away." Over the long term, excluding dividends, the average return of the S&P 500 between May 1st and October 31st has underperformed the average return of this same index between November 1st and April 30th. In the table below, you can see the sizeable difference in average returns during those time periods since 1957 and in the most recent ten-year period.

Source: S&P 500; St. Louis Federal Reserve; Cetera Research; Data as of 4/30/2013

Though there is no specific cause of this discrepancy in market performance, some believe it is the combination of lower summer trading volumes due to vacations, summer portfolio window dressing by money managers, and the annual concerns about third-quarter earnings prospects.

Given this performance phenomenon, the most logical strategy might be to completely sell out of equities in May and purchase in November. However, there are limitations to implementing this strategy, such as the additional transaction costs and tax implications of the rotation into and out of equities. Another drawback is that market timing and seasonality strategies do not always work out. For example, in 2007 and 2009, the May 1st to October 31st time period outperformed the post-summer period (November to the following April) by double digits. Therefore, if you move your portfolio entirely into cash and the strategy backfires, gains may be missed. Given the fact that this "sell in May and go away" strategy does not always work and may increase transaction costs and raise tax implications, how should investors position their portfolios?

First and foremost, we do not anticipate a sharp market decline. Instead, as we have noted in past commentaries, we expect increased volatility and some possible modest near-term weakness. Equity markets do not move straight up, but are instead characterized by occasional consolidation phases (i.e. short rests or minor pullbacks). Given that U.S. equities have returned all of the losses they generated during the 2008 financial crisis and headwinds persist (weak global economic growth, increased geo-political risks, and mediocre corporate earnings), a minor pullback might be in store. On the other hand, positive tailwinds (improving housing market, low interest rates, and not too expensive equity valuations) may support equity prices. These conflicting signals continue to lead us to believe sharp declines are not necessarily in store. Instead a minor pullback with significant market volatility is the most likely outcome this summer.

With equity markets likely to face both headwinds and tailwinds and gyrate accordingly to the news du jour, we remain steadfast in our recommendations. We continue to maintain a neutral market position, or in other words, do not be too aggressive or too conservative in overall portfolio positioning. While we continue to suggest equity allocations in-line with investment objectives, within equities we are biased toward domestic equities and larger capitalization companies. Throughout the portfolios, we continue to stress income via dividends or spread product (non-U.S. Treasury fixed income), which may help to mitigate some market volatility, and increased diversification.

This information is compiled by Cetera Financial Group. No independent analysis has been performed and the material should not be construed as investment advice. Investment decisions should not be based on this material since the information contained here is a singular update, and prudent investment decisions require the analysis of a much broader collection of facts and context. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy.

Securities and insurance products are offered by Cetera Investment Services LLC(doing insurance business in CA as CFGIS Insurance Agency), member FINRA/SIPC. Cetera Investment Services is not affiliated with the financial institution where investment services are offered. Investment products are: * Not FDIC/NCUSIF insured * May lose value * Not financial institution guaranteed * Not a deposit * Not insured by any federal government agency.

All economic and performance information is historical and not indicative of future results. The market indices discussed are unmanaged. Investors cannot directly invest in unmanaged indices. Please consult your financial advisor for more information.

Additional risks are associated with international investing, such as currency fluctuations, political and economic instability, and differences in accounting standards.