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May is fast approaching and that means the selling will soon begin.
Or will it?
Should You Sell in May?
The old investment adage, “Sell in May and Go Away,” has long been touted as the sound theory for buying low and selling high. If you sell your stocks in May and buy back in October, you’re usually better off.
The sell-in-May mantra is one of the best-known and most successful seasonal sell signals, made famous by the Stock Trader’s Almanac.
The Almanac‘s “Best Months Switching Strategy” – which gets investors in and out of stocks at the start and end of the six-month periods – shows how profitable it can be to get out of stocks around May. It shows that a $10,000 investment between the May and October period since 1950 in the Dow Jones Industrial Average would be worth $6,724 today, whereas the $10,000 would have grown to $1.6 million in the November-April period.
According to the guys at Plexus Asset Management, the S&P 500 Index also proves the theory. Their research shows that the returns of the “good” six-month periods from January 1950 to April 2011 were 8.1% per annum whereas those of the “bad” periods were 2.4% per annum.
But this theory isn’t perfect.
While the sell in May theory is generally true, it doesn’t mean it always is.
If you go back from 1950-2011, the S&P 500 actually made gains 39 times between May and September, and only lost 23 times. That means the market actually has moved up 63% of the times in the last 61 years.
This theory also doesn’t factor in an ever-changing investment climate. In the last decade, there have been some tremendous returns in the summer with 2009 returning nearly 19% and 2003 nearly 16%. In the last seven years, five of them have been profitable during the so-called “bad months.”
Times are changing and with change comes great opportunity.
What about the Canadian Markets?
In past years, the Canadian markets have actually slightly mimicked the historical returns of the S&P 500.
According to Myles Zyblock, chief institutional strategist at RBC Capital Markets, owning TSX stocks between November and April, then switching into bonds for the remaining months, produced an annual return of 13.5% based on data from 1956 to 2011. That compares to a return of 9.2% for a buy-and-hold strategy for stocks and 7.7% for bonds.
His research showed that consumer staples, utilities and telecom consistently do better than the index between May and October, while information technology, materials (excluding gold) and industrials are the leaders between November and April.
Does that mean we should be out of our gold and precious metals stocks?
Not one bit. His research also showed that the TSX-listed banks and gold stocks tend to do well in the summer months. When you consider that all of the gold stocks have been completely oversold, the coming months could be a time where they significantly break to the upside.
Once the weak hands get shaken out, I fully expect that investors will slowly chip away at the offers in the coming months. While the summer may be slow for the rest of the markets, I don’t expect them to be slow for precious metals stocks – especially the juniors where overselling has taken many of them far below their true value. If the selling keeps up, it may represent the greatest opportunity we have ever been presented in the last few decades.
With all of the stocks in the gold sector oversold, the time to hunt for bargains is now. It has been for the last few weeks. The charts show that a major rally is coming. If you’re not looking now and getting ready to pull the trigger, you will likely kick yourself before the year is over.
The junior market is not for the weak. While I expect many of the gold juniors to climb, it doesn’t mean it will be a straight line. Nor does it mean to buy every junior with a chart that has been trending down for the last year and trading at its 52-week low. The truth is, many of them are garbage. But amongst the filth, there are some with amazing projects and the people to back it up. Nothing is more important than that.
I’ve already zoned in on a few gold juniors that have been beat up, despite incredible drill results in some of the most promising areas on the planet. These companies all have great projects and great people that have made millions for their shareholders. More importantly, the companies that I am looking at now all have cash. In this market environment, having cash is king. You don’t want to dilute your shareholders at these ridiculously low price levels by financing your next drill program in this market.
If you would like some help tracking down some of these gold stocks that meet both of these criteria, then make sure to open your emails in the coming weeks. I am getting ready to pull the trigger on some new investments which means you will have the opportunity to see what I buy and where I buy it.
Until next week,
Ivan Lo
Equedia Weekly
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Disclosure: I am long gold and silver through ETF’s and bullion, as well as long both major and junior gold and silver companies. It’s your money to invest and we don’t share in your profits or your losses, so please take responsibility for doing your own due diligence. Remember, past performance is not indicative of future performance. Just because many of the companies in our previous Equedia Reports have done well, doesn’t mean they all will.
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