If selling in May is sensible, buy back the day of St. Leger can be risky

If selling in May is sensible, buy back the day of St. Leger can be risky


Funds Society
By Matthew Sutherland - Head of Product Management at Fidelity Asia

"The proverb refers to the tendency of markets to fall behind during the summer months and pick up again near the end of the year, and his philosophy is that you actually save money if you stop trading in May and will take five holiday months. This phenomenon occurs so often that surprisingly has not been the subject of arbitration. During the 65 years since 1950, according to the Stock Trader's Almanac, the Dow Jones index generated an average return of 0.3% between May and October, compared with 7.5% between November and April.

If selling in May is sensible to buy back the day of St. Leger can be risky, because since 1950 September was the worst month of the year, with an average return of -0.65%. Some famous cracks occurred in September, including the first the nickname "black", won the Black Friday 1969. The Black Wednesday, which marked the assault of George Soros sterling, held in September 1992, and the result was that the British currency was forced to leave the European Exchange Rate Mechanism of the European Monetary System, which caused a dramatic drop in the British pound and cost over 3,000 million pounds to the UK Treasury. In the months of September 2001 and 2008 daily huge falls in stock markets, in the first case because of the attacks on the World Trade Center and in the second case because of the subprime crisis they occurred.

October did not get much better standing in relation to stock market cracks and the facts that have given notoriety spread over 80 years. The first was the "Panic of 1907" a classic credit crisis caused by the industry trusts. There were bank runs, strong sales in the bag and all that stood between EE. UU. and an even more serious situation was a consortium led by JP Morgan, which made the job of the Fed before there was the Fed. In October 1929 there was a bleeding unprecedented three "dark days" -an Tuesday, a Thursday and Monday blacks, each with its own record fall. Finally, in October 1987 it took place on Black Monday, the first crack which I personally witnessed as a participant of the market, where automatic orders stop loss exacerbated the downturn in the markets and led to the first truly global crack reactions mutual markets worldwide falls.

After the storm comes the calm

However, as they say, after the storm comes the calm and historically more late October has announced that beginning in bear markets. The fact that it is considered a negative can actually make it one of the best buying opportunities. The falls of 1987, 1990, 2001 and 2002 slowed in October and gave way to long-term blips. Especially Black Monday in 1987 was one of the great buying opportunities of the past 50 years. The Peter Lynch of Fidelity itself, among others, took the opportunity to buy solid companies that had eluded him in the last stretch upward. As the market recovered, many of these values ​​soared to its previous assessments and a select few were much further.

There is a reasonable explanation for the weak markets in the summer months and subsequent recovery towards the end of the year, and has to do with the forecast. Analysts usually start each year with growth forecasts relatively optimistic benefits. In part, this is because they are encouraged to be optimistic. These figures are relatively high starting revised downwards as the year progresses and it is increasingly clear that the original forecast will not be met. Then, when they come September and October, analysts are beginning to focus on results the following year, and again start with optimistic forecasts.

2015 was a classic year for "sell in May". Asia excluding Japan peaked on April 28; The World Index peaked on 21 May and the onshore markets of Shanghai and Shenzhen China peaked on June 12. Since then, the world has fallen by 6%, Asia excluding Japan 21% and China 30%. So "they sell in May and go away" would have been the best this year.

But we must "buy back the St. Leger Day", in other words, in September, or should we wait and see if this year we will have a surprise like "Black Friday" event during the usual months of September or cracks October?

The argument against buying in September and would probably be the standard engine market recovery later in the year, the change of focus from the benefits of 2015 to 2016 can not provide a big boost this year. This is because it is also quite likely that earnings prospects for 2016 are revised downwards during the next quarter, when the reality of slower growth, not only in China but in a number of emerging markets, will turn against .

However, a crack in all rule in September or October is also quite unlikely. After all, he has already left much air balloon as a correction of 20% -30% in Asia and emerging markets to date. US developed markets. UU. and Europe, albeit marginally affected by weaker emerging markets (especially China), still showing reasonably robust. The weak market and a slowdown in China reduce the likelihood of rate hikes from the Fed in September, and Japan and Europe continue in full quantitative easing.

Furthermore, the probability of a large collapse by contagion in emerging markets, as in 1997-98, is mitigated by the fact that in Asia in any case, the fundamental of the countries are acceptable. Its debt profile is predominantly domestic; inflation remains at a low level; central banks have room to react; most of the current account shows a surplus; foreign exchange reserves are much higher and exchange rates are flexible and are where they should be in general terms.

Therefore, whether you choose to re-enter the market on St. Leger Day or wait until October, one thing is certain: it is now unquestionably a better time to buy than May!"