This seemingly time tested tactical trade—please forgive the tongue twister—is on the minds of many traders these days and was actually this article's first working title. I didn't go with this title as I believe it's more helpful to focus on the causes why—rather than how—markets behave this way.
I mean we all know that markets tend to sell-off in May—going into the so called Summer Doldrums—and then bounce sometime going into Autumn. We've written about this several times—plus other market trends such as the January Effect, Super Bowl Indicator, Halloween Indicator to the Santa Claus or Ho-Ho Year-End Rally. And don't forget that this is the first of a new four-year Presidential Cycle—typically the worst year for markets, as shown in our October newsletter.
The fact is that trading volumes and prices do tend to sag over the summer. But why? Many point to this lull resulting from everything from a seasonal lack of news and corporate earnings, to even collective mood changes as daylight hours peak and when traders start focusing more on vacations—with golf-swings substituting for swing-trades.
We can debate the causes Why markets sell-off after May. Regardless—assuming the above chart is accurate—the question If seasonal trading is worth the effort seems obvious. I mean it's hard to argue against 60+ years of Seasonal Investing from only November 1 to April 30 each year—compared to a simple Buy And Hold strategy—that turned $10,000 into $943,130 instead of $659,116... isn't it?
The article describing this chart doesn't say if dividends—and interest payments when out of stocks over the summer—are factored in and reinvested, or how extra trading commissions are treated. This skews results significantly—dividends have represented over half of total market returns since 1926. In any event, getting an extra 43% return—$284,014 more—still might seem worth it.
While the above long-term chart dramatically demonstrates a strong case for selling in May, the article points to only one reason why markets behave this way. For me, it's hard to totally discard both fundamental and technical analysis for instead investing based purely on mood swings tied to seasonal daylight hours—diagnosed as Seasonal Affective Disorder (SAD).
Dow Theory
Dow theory is the basis of technical analysis and incorporates market news, Fibonacci Retracements and Sector Rotations into stock price movements. Both Industrials and Transportation Indexes have to be moving in the same direction to confirm a market trend, and when they diverge it's a warning sign of a trend-change. A developing trend needs to be confirmed by above average volume, and a trend remains in place—despite Temporary Reversals—until a new trend is established.
Dow Theory—with the Dow Jones Industrial Average (DJIA) and Dow Jones Transportation Average (DJT) both at all-time highs—confirms the U.S. stock market is in an up-trend. Although Dow Theory doesn't speak directly as to why markets seem to sell-off in May, it does provide rational value-related reasons why markets trend in general. It also suggests staying with a trend, as trying to predict short-term corrections—seasonal or otherwise—is not worth the effort.
Dow theory has a history of predicting market trends and has three phases: Accumulation, Public Participation and Distribution. While this all sounds impressive, studies show that investing based on Dow Theory alone under-performs a simple buy-and-hold strategy using a well-diversified portfolio.
I believe the most recent accumulation phase started mid-2009 and we have just started the public participation phase. In case this timing is behind and we are instead at the distribution phase—often just before a major market correction—keep your eyes and ears open for telltale signs of a market blow-off. I mean be a little scared when your C-store clerk or hair dresser starts citing Cramer—especially if you find out they flipped houses for a living a few years ago.
The first phase is when informed investors are buying. This is rationally motivated by opportunistic low values. You might as well call this the Contrarian Investor phase, when the general public's sentiment is negative and they are not buying. This is when an investment sector is cold, has been totally beaten down and prices seemingly will not stop going lower.
In 2009 this included banks, mortgage companies and home builders, autos, airlines and shipping transportation, to even pharmaceutical and drug companies. Analysts were not recommending even the largest of these, although they are now—at multiples of their share prices back then.
Now there's a trend analysis I'd love to see—brokers' recommendations for the NASDAQ Composite and S&P 500 component stocks back-tested as far as possible. Would you have made more money betting against the consensus, than with it? You likely would have bought most Dot-Com Stocks near the top in the late 1990s, and sold almost every stock near the bottom by early 2009.
The 2008-2009 market was scary—with real debt reasons to still be scared—as almost everything sold off hard! However the bonus of a really bad stock market is that we can upgrade quality and buy shares in the biggest, safest companies at extremely low prices that eventually—with few exceptions, knock on wood—will come back.
Even the most aggressive Alpha-Beta hungry traders should realize that sometimes you don't have to go out that far on the risk curve to find potential 10+Baggers. Looking at our Top 30 Small-Caps and Past Small-Caps pages, two standouts added on March 30, 2009 were (NYSE: CBS) CBS at $3.79—now $51.03, and (NYSE: LVS) Las Vegas Sands at $2.85—now $59.48. Our thesis then was simple: these are quality leading names at generational lows, people will continue to watch TV ads and gamble, and these companies will likely survive.
Follow, Anticipate, Or Ignore Market Trends—What Does Buffett Do?
Investment decisions are made both rationally and based on panic fear and greed; therefore we might consider both Efficient Market Theory and Human Behaviour. This is further complicated because it's not easy to discern evidence-based foresight from rear-view driving—or even facts from coincidence.
Much of this summer's sell-off or rally may depend on how the U.S. government deals with raising the debt ceiling again, and any further credit downgrades. This—with more geopolitical noise from Europe and elsewhere—has not been pretty over the last few summers. Many rational investors are convinced that these market worries will result in more of the same—but nobody knows for sure.
Instead of gambling on short-term market expectations, only a company's business value should determine how much a stock is worth and whether it should be bought or sold. This only makes sense as we are buying shares in companies, not in stock markets—unless you invest in index ETFs.
Consider that the world's most successful investor—Warren Buffett—focuses exclusively on easy to understand business values and growth; he is not at all superstitious about When he buys or sells, and his favourite Holding Period is forever! At the market depths of 2009 he was buying high-yield debt plus huge chunks of common and preferred shares in severely beaten-down leading names such as (NYSE: GE) General Electric, (NYSE: GS) Goldman Sachs and (NYSE: HOG) Harley-Davidson.
Instead of starting in 1950 with $10K that turned into less-than $1M by 2013—with Seasonal Investing—you could have waited until 1964 for Buffett and turned $10K into $80M by the end of 2009. At that time his holding company (NYSE: BRK.A) Berkshire Hathaway was $99,200 per share—world's highest publicly traded share price. Now at around $170,000 per share—up another 71% in 3+ years—Buffett's $10,000 long-term investors each have around $137-million!
Seasonal Investing doesn't seem that impressive anymore... does it?
Conclusion
It's hard to say if there will be a market sell-off again this May—there have been many exceptions. Momentum Traders might say less likely, Contrarians more likely, with Value Investors neutral. Seasonal and Astrological Traders might say get out now, while Dow Theorists might argue the current bull-market trend could last for years. Buffett would probably say... Who Cares?
Is this a Goldilocks and the Three Bears—or even Three Bulls—market? Here's a few more stats to further muddle the issue:
- All major U.S. markets are higher this year—up around 20% from the November lows.
- The DJIA and S&P 500 are at their all-time highs—around 15,000 and 1,600 respectively.
- The market has not had three down days in a row this year—for the first time ever.
- I believe the market has not had a down Tuesday so far this year.
- P/E Multiples are near long-term averages—but far from tops seen in past bull markets.
- While corporate earnings are higher, revenues seem flat—is this growth or just cost cutting?
- The most daylight is on the Summer Solstice—not in May but June 21 at 5:04 GMT this year.
- Both Industrials and Transports still confirm an up-trend—despite it being mid May.
- Over 50% of the time since 1900 the market has actually been up in May.
They say it takes all kinds to make a market! While I agree that buying when market values seem overly pessimistic and selling when overly optimistic makes sense, this too is really no different than stating the obvious—Buy-Low, Sell-High. This applies every May—and for all other months.
Just because the lost decade—as I call it, for investment purposes—produced regular summer sell-offs does not in itself mean the market will slide again this year. So far, this year actually feels more like pre-W. Bush in the mid-1990's—which had several red-hot Summer Rallies.
Then again, perhaps I'm just wrong and markets sell off simply because we're SAD. Unconvinced, I prefer a more rational theory—that we're instead sad because markets sell off!
(AMEX: URZ)(TSX: URZ) Uranerz Energy Corp. Update
In April we wrote, "Last October the company received its Deep Disposal Well permit—the last authorization required to begin operations and commercial uranium production. Since that release, the company's news flow has been somewhat quiet and URZ' shares have sagged with most uranium stocks—from around $1.70 then, to around $1.00 today."
Further on we wrote, "Unless I'm missing something, the only other approvals are for Wyoming's governor, attorney general and state treasurer to sign-off. Perhaps an update or some other type of financing announcement might be in the works soon—as it has been five months since Uranerz' last new release about this loan." These approvals have been received and Uranerz is now working with state administrators to complete the documentation to close this $20M financing.
It appears that Uranerz' quiet period has ended as the company released four announcements recently: an expected amendment to their 2012 annual report, an update on their state loan application, a corporate update to shareholders, and their first quarter 2013 financial results. URZ' stock price has responded positively and is now $1.35—around 35% higher. We look forward to further mine construction, exploration and disposal well drilling updates this spring.
Uranerz' full shareholder update is at Uranerz.com. A few snippets that caught my eye were:
"The Company's primary focus over the past year has been on construction of our processing facility and installation of the monitor, injection and recovery wells for in-situ recovery operations at Nichols Ranch. The initial wellfield is now substantially completed. The processing facility is over 80% completed with tanks, pumps, ion exchange columns, sand filters and ancillary equipment fully installed. Installation of the process piping, electrical controls and the control room is ongoing."
"The Company expects the Nichols Ranch ISR Uranium Project to recover uranium later in 2013. Regulatory milestones are being pursued in order to meet start-up requirements following completion of the processing facility and wellfield construction activities. The drilling pads for the required two deep disposal wells have been completed and drilling is ready to begin. The Nichols Ranch ISR Uranium Project is licensed for a recovery level of up to two million pounds of uranium per year with initial annual recovery targeted for 600,000 to 800,000 pounds after ramp-up. Nichols Ranch will serve as a platform for the potential future development of the Company's other Powder River Basin properties with possible enhanced economics for adjacent and satellite projects."
"Earlier this year the Company signed a second long-term uranium sales contract with (NYSE: EXC) Exelon, the operator of the largest nuclear fleet in the U.S., for the sale of uranium over a five year period commencing in 2016, at defined prices adjustable for inflation. As previously announced, the Company had already entered into one sales contract with Exelon and has another in place with another utility, for a portion of its planned production."
"In 2010 the Company implemented a Shareholder Rights Plan to safeguard our shareholders' interests by discouraging undervalued or unfair takeovers of the Company. In accordance with its terms, the Plan is required to be reconfirmed by shareholders at our 2013 Annual General Meeting.
The hub of uranium production in the U.S. is the Powder River Basin of Wyoming. On May 14, World Nuclear News reported about a significant milestone, that production has begun at (CCJ: NYSE)(CCO: TSX) Cameco Corp.'s North Butte ISR mine. This mine is less than 15-miles north-east of Uranerz Energy's Nichols Ranch mine—uranium-bearing resin from both mines will be processed into concentrate at Cameco's nearby Smith Ranch-Highland Project.
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