Last chance to sell in May and go away
The longest running market meme is to sell in May and go away. Will it be right to do so this time? Tomorrow (Friday) is your last chance…
As a young stockbroker, I found that business from late-May onwards into the summer was doubly frustrating. Investment managers from whom I hoped to get buy orders would be “out of office”. While I was at my desk or on the floor of the stockmarket, they would be at Lord’s for test match cricket, followed by Royal Ascot for the racing and socialising, Henly for the rowing regatta, and Wimbledon for tennis. Quite simply, the buyers were out of town and in their absence the market would wilt.
For these reasons, selling in May with a view to returning to the market later in the year made sense. So off I would go to Lords, Ascot, and Wimbledon as well.
This time, there are extra reasons to be cautious.
The first is that equities have become completely detached from the reality of what’s happening to bonds. In general terms, when bond yields rise, that’s bad for equities and when they fall that’s good for equities. This is because bonds set a return hurdle for equities to at least match and even exceed their yield returns, given that equities are higher risk with uncertainty.
If you chart an equity index, such as the S&P 500 and compare it with the long bond’s yield, the correlation should be consistently negative. In other words, a track to higher bond yields will lead to lower stock prices. By inverting the bond yield, the two series should track each other. This is demonstrated in the chart below:
