'Sell in May' strategy makes bulls cautious

"Sell in May and go away" became a Wall Street axiom two decades ago, thanks to the Stock Trader's Almanac. The strategy may be more compelling than usual for US stock investors this year, according to its editor.

The Dow Jones Industrial Average may tumble as much as 30 per cent between May and October from the six-year high set last month, said Jeffrey Hirsch, president of the Hirsch Organisation in Nyack, New York. His forecast reflects the six-month period's track record, the mid-term congressional election in November and Ben Bernanke's arrival as Federal Reserve chairman.

"We have a very lofty market entering a seasonably unfavourable time in the most vulnerable period in the election cycle," said Hirsch, 39, whose father Yale started the almanac.

"This is something that we've been pounding the table about and we're even more concerned about it now."

Hirsch isn't the only analyst anticipating a retreat. Tim Hayes of Ned Davis Research said stocks might slide at least 10 per cent in the next six months. Bear Stearns' Francois Trahan said the history of the "sell in May" strategy ought to make bulls cautious.

The market stalled last week as Microsoft gave a disappointing profit forecast and China raised its main interest rate.

JPMorgan Chase led banking stocks higher as Bernanke signalled the Fed may suspend a policy that has resulted in rate increases at 15 straight meetings.

Last week, the Standard & Poor's 500 Index lost 0.1 per cent to 1310.61 and the Nasdaq Composite fell 0.9 per cent to 2322.57. The Dow Jones Industrial Average rose 0.2 per cent to 11,367.14, boosted by JPMorgan.

The S&P 500 notched a 1.2 per cent gain for April, its best performance since January, and the Dow reached levels not seen since January 2000. First-quarter profits that topped analysts' estimates drove the rally, a fitting end to what traditionally has been the market's best six-month stretch.

About 70 per cent of the S&P 500 companies that reported earnings beat Wall Street's projections, above the 57 per cent average since 1992, data from Thomson Financial shows.

Financial-newsletter writers are increasingly calling for stocks to fall 10 per cent, according to Investors Intelligence.

Advisers predicting a "correction" climbed in the week ended April 21 to 28.8 per cent, the most since August 2004, a survey by the New Rochelle, New York-based newsletter showed.

Their opinions may reflect the calendar. An investor who placed US$10,000 in the Dow average at the end of April each year since 1950 and sold at the end of October would have a net loss of US$272, according to Hirsch's calculations. Someone doing the opposite would have gained US$534,323.

The Dow has risen 0.3 per cent on average in the May-to-October period since 1950. For November through April, the Dow has climbed 7.9 per cent - a performance that reflects year-end bonuses, tax refunds and pension-fund contributions flowing into stocks.

Last year, the 30-stock average gained 2.4 per cent in May to October. The Dow industrials then climbed 8.9 per cent from November to last week.

"There is validity to the seasonal trend in any given year, but especially in an election year," said Hayes, chief investment strategist at Ned Davis in Venice, Florida, whose more than 1000 clients include some of the biggest investors.

Data from S&P shows that in a President's four-year term, the second and third quarters before mid-term elections are the weakest periods for stocks. The S&P 500 has fallen 2 per cent and 2.2 per cent, respectively, on average since 1945.

The Dow average's low for years that featured mid-term elections was 22.2 per cent below the previous year's high on average since 1913, according to Hirsch.

This year, the trend may be especially meaningful "when we think about how low the popularity of the president and Congress have dropped," Hayes said. "That adds to the uncertainty."

President George W. Bush's approval rating in a Wall Street Journal-NBC News poll published last week slipped to 36 per cent, his lowest ever. The rating for Congress was lower, 22 per cent.

Bernanke succeeded Alan Greenspan as Fed chairman on January 31. In three of the four instances since 1970 when a central-bank chairman took the helm, stocks fell to a bear-market low within eight and a half months, according to the Stock Trader's Almanac.

The market's "Black Monday" low, reached on October 19, 1987, occurred two months after Greenspan took over.

Then again, prices have risen this year in the face of record oil prices and more Fed rate increases than investors first expected, Jeff Kleintop, chief investment strategist at PNC Advisors in Philadelphia, wrote in a report last week. Crude oil reached US$75.35 a barrel last month, and the central bank may raise rates for the third time this year at a meeting next week.

"The market has proven to be resilient," wrote Kleintop, who helps manage US$50 billion. A decline from May to October "is unlikely without further gains".

Bear Stearns' Trahan, chief investment strategist for the New York-based firm, was more pessimistic. In a note to clients last week, he pointed out specific stocks that tend to trail or beat the market during the six-month period.

"This is one seasonal investing method that holds some water, given its robust track record," wrote Trahan, the top Wall Street strategist in a survey by Institutional Investor magazine last year. "The summer months are a good time for remaining bulls to think about pulling in the reins."

Investors should avoid consumer-products companies dependent on discretionary spending, including General Motors, Trahan wrote. He also warned against tech shares, including Advanced Micro Devices, the world's No 2 computer-chip maker. Household-goods and food companies such as P&G and Altria, the parent of Philip Morris, may be better bets.

- BLOOMBERG

* London markets were closed yesterday