“Sell in May and go away” is looking like it may be correct in 2010.
This is the old adage that investors should sell their stocks in May and buy back after Halloween.
There are many theories on why this may be beneficial, such as the fall-off in trading demand in the northern hemisphere when the summer season hits.
But is there any truth in it for the Australian market?
One thing that markets don’t like is uncertainty and there has been plenty of uncertainty in May in Australia.
It’s been a dismal start to the month with uncertainty over the Resource Super Profits Tax, an increased perception of regulatory risk in Australian assets and worries over Europe and China.
Think of it this way: if you were an investor looking to invest in Papua New Guinea, and the PNG government decided it wanted to impose a super tax on resource companies, as an investor you’d only invest in that country if you could find a huge bargain.
That is, you would discount the attractiveness of the investment because of the perceived increase in regulatory risk.
Remarkably, this situation isn’t happening in a developing country like PNG. It is actually happening in Australia!
Money managers are applying a higher discount to Australian assets due to this increase in perceived regulatory risk.
The truth is that the proposed Resource Super Profits Tax will not go through in its current proposed form. But the damage to Australia’s reputation on the global investment stage has already been done.
The latest announcement by the government is in addition to the perception of increased regulatory risk in the telecommunications sector in Australia. That’s been caused by the National Broadband Network NBNCo.
And the scrapping of the government’s emissions trading scheme hasn’t helped that perception either.
After crunching the numbers from 1993 when the ASX 200 benchmark was introduced, it looks like there is no basis for this old adage.
During the last 17 years, only six of those years would have seen you better off if you were not invested in the sharemarket between May to October. Those years where adopting the “Halloween strategy” would have been beneficial for you were 1994, 1998, 1999, 2001, 2002 and 2008.
So when the market sees a negative performance for the year, then you are better off selling in May and buying back in November.
Hindsight is all well and good, but how can you identify the year to adopt that Halloween strategy?
It looks like this adage works in falling markets but not in rising markets. So in a negative performance year, you would be better off having your money in cash.
I’d have to say yes! But that doesn’t mean you should stop trading.
A fall in prices is a haven for bargain hunters. Just be sure to jump in after signs that the uptrend has resumed.
An increase in regulatory risk for Australian assets means that overseas assets look more attractive. While it is more difficult for Australian investors and traders to get access to overseas markets, it is possible through the ASX through Exchange Traded Funds.
One thing’s for sure — it will be interesting to see what happens next!
Happy trading!
Julia Lee Equities Analyst Bell Direct Have you started trading with Bell Direct for just $15 a trade? Register now for free.