INSIGHTS

On May 26, 2016

Which Way at the End of May?

There has been a large amount of speculation and research into the seasonal mantra in equity exposure that says “Sell in May and go away.” Our viewpoint is that the more oft quoted a phrase or buzzword becomes, the less effective it is. In a measurement of monthly returns from Guggenheim from 1929- 2012, September has been the worst month to be invested. However, May has been second most volatile; and yet the months of June, July and August were all positive – on average. We subscribe to the narrative that long-term success is dependent upon time in the market rather than trying to time the market. Though only through 2012, the recent 3.5 years’ worth of data won’t materially shift the results of the 83 years of data from their study.

To make the “Sell in May” investing philosophy work, one must be willing to put aside emotion and pick the re-entry point at a time when headlines and data are at their worst. Study after study has shown that the performance of investors who move in and out not only ring up more transaction fees but continually underperform long-term market returns. It seems we can never get enough of the hunt for the “Lucky Charms.”

To further illustrate this opportunity, consider the wide specter of negative sentiments bombarding the markets:

• The data coming from the American Association of Individual Investors showed an intriguing point about fear and uncertainty. The chart below shows where the neutral and bullish investors have stood on a monthly basis to smooth out a bit. What one finds is that on the monthly basis, the increased amount of neutral investors and decline of bullish investors tie into roughly the same period 28 years ago – fall of 1988.
  

   

  
  

  

  
  

  Using the third quarter of 1988, consider what the total and annualized returns were in the following three years in the S&P 500 and Russell 2000.

  
  

  

  
  

  The second year struggled after a significant gain in the first year; however, consider that the average annual return in the S&P 500 from 1927 – 2015 is 5.54%. If one had the fortitude to hold through the tumultuous second year of 1990, the investor still nearly tripled the annualized return over the three years. You may recall that 1988 was an election year as well…. Oh how history rhymes.
  
  
  
  

  
  


• One of our favorite sentiment indicators is the monthly Bank of America Merrill Lynch Global Fund Manager Survey. In their most recent release, they noted that the cash position rose to 5.5%, well above the contrarian point to buy when they hold 4.5%. It seems they are continuing their doomsday prepping. Couple that with those fund managers saying they are overweight equities fell to 9%, a reading only seen five times in the last 9 years. A rough analysis found a few important things including that many of these readings seem to fall in the springtime and the average annualized return for the S&P 500 for the next 12 months after hitting the current level was 16.01%. Only the period where it hit the level in 2008 showed a negative 12-month return.
  
  
  
  


• One of the more affirming contrarian signs could be the events that are surrounding the hedge fund arena. Much has been written about the substandard retunes of hedge funds measured as a whole and their high fees; however, lesser written about is the directional bets needed to be made to generate alpha and anemic success rate such strategies hold over time. As such, Bianco research has shown a rising correlation of general hedge fund performance and the movements in the general equity markets. In an article today from Bloomberg, Blackstone Group President Tony James says hedge funds could lose 25% of their assets in the next year or a little over $700 billion. FactSet reported that the top 50 hedge funds as measured by assets exited equities in the first quarter to the tune of $55 billion with the largest liquidated position being that of Apple. Is there any surprise that Berkshire Hathaway recently purchased a billion dollars’ worth of stock?
  
  
  
  

As we begin to enter the summer months and vacations and time off begin to moderate the volume traded in the markets, keep in mind Warren Buffets quote: “Someone is sitting in the shade today because someone planted a tree a long time ago.”

CRN: 2016-0517-5360R

This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the Disclosures webpage for additional risk information. For additional commentary or financial resources, please visit www.aamlive.com.

AAM was not involved with the preparation of the articles linked to in this email and the opinions expressed in these articles are not necessarily those of AAM