May 14, 2014

    Sell in May and go away comes with caveats

    SELL in May and go away may not be just an old saying.

    Followers of that adage would have come out on top for about two thirds of the past 14 years, according to an analysis by The Business Times.

    But sellers beware: That finding comes with caveats galore. The sample size was too small to extrapolate future outcomes, and the strategy was not the most profitable.

    Analysts also note that there are many other factors that guide stock prices, which might serve as more meaningful guides to investing.

    The Straits Times Index (STI) fell in May for nine out of the past 14 years, Bloomberg data showed. Month-end data for the STI before August 1998 was not available.

    On average, the STI slipped 1.1 per cent between April and May every year, compared with an average gain of 0.5 per cent for every other month.

    "I've done the backtest myself and I've seen the seasonality," DBS chief investment officer Lim Say Boon said. "But it's not so strong a probability that it would guide the advice that a responsible professional would give."

    Whether the correlation in Singapore has a fundamental basis remains to be seen. The premise for "Sell in May" is that markets will take a break when the summer holidays arrive.

    If that reasoning is correct, markets where summer holidays are more pronounced than in Singapore should see stronger selling in May. But the opposite is true.

    In the United States, the Standard & Poor's 500 index has gained in May for 21 out of the past 29 years.

    In London, the FTSE 100 declined in 15 out of 29 Mays, but on average the index has added 0.1 per cent in value during the month.

    In Australia, where the seasons are reversed, May was a positive month in 17 out of 29 years, but on average the All Ordinaries index has been just south of flat in May.

    OCBC head of research Carmen Lee noted that staying out for a month risks missing big gains, such as the 21 per cent increase in the STI in May 2009.

    The practicalities of using the strategy can also be tricky. Maybe you sell in May, but when do you come back? June and July have been good months for the STI over the years, but if you return so early you might want to sell again in August, which has been even worse for the index than May.

    "It was down 10 times (out of 14 years) in August! So, it could perhaps be coined as 'sell in August' for the Singapore market," Ms Lee said.

    Bank of Singapore chief investment officer Hou Wey Fook highlighted the high costs of monthly tweaking, "whether it involves liquidating the entire portfolio or switching into other asset classes", he wrote in a recent report.

    CIMB head of research Kenneth Ng said there are many factors that drive the Singapore market.

    "Just talking about markets is useless," said Mr Ng, who is considering lowering this year's target for the STI in the light of companies' profit guidance, Singapore companies' exposure to slowing growth in Asia and concerns about asset prices.

    "A lot of it is driven by fundamental earnings of individual companies."

    Ms Lee said broader market trends can provide better guidance. "For the past few months, interest has moved to M&A in Singapore," she said.

    "In this space, we have seen several big acquisitions and deals and this has proven to be a good indicator for a revaluation of several previously undervalued stocks in the local market."

    Mr Lim was not as quick to dismiss technicals, explaining that investors with shorter horizons are not as sensitive to fundamentals.

    "Right now the technicals in the US tell us that we are likely to get some kind of correction," Mr Lim said.

    "But, then again, those signals will show every few months."