Tuesday, April 30, 2013 - Relax, 20 Years Pass in the Click of a Mouse

Relax, 20 Years Pass in the Click of a Mouse

by Sinclair Noe

DOW + 21 = 14,839
SPX + 3 = 1597
NAS + 21 = 3328
10 YR YLD + .01 = 1.67%
OIL – 1.46 = 93.04
GOLD + .70 = 1478.20
SILV - .24 = 24.45

The Dow Industrial Average did not hit a record high close. The old record close is 14,865. The S&P 500 did hit a new record high close. What next? Sell.

Tomorrow is May 1^st. Sell. Sell everything, or at least all stocks. We've been over this before. The theory is “Sell in May and Stay Away”. This is the best six months, worst six months theory of investing. It basically says you sell stocks in May and you buy back in November. The six months from May to November are bad; the six months from November through April are good. This works on broader stock averages and it can also apply to individual stocks, but the results on individual stocks are not as predictable. So if you have a S&P 500 Index Fund, or a Dow Industrials ETF, or something like that, sell.

The S&P 500's gains between November - April have trounced May - October returns for more than 60 years. Annualized gains from November - April have averaged 13.8%, while May - October gains have averaged only 1.4%. Numerous academic studies of the market going back many decades have confirmed that even though there is not a correction every year, an investor who simply bought the Dow or S&P 500 via an index mutual fund or ETF on November 1 each year, and moved to cash on May 1 outperformed the market over the long-term by a significant amount.

Had you adhered to the old adage "sell in May and go away" for the past three years, you would have not only avoided a lot pain, but you would have likely outperformed the benchmarks, as well. This as the springs of 2010, 2011 and 2012 each marked the starting point for sell-offs that would shave anywhere from 9% to 19% off of the S&P 500 in just a matter of months.

Does that mean it outperforms the market in every individual year? No. But then there is no strategy that does. Money managers hate it because it is so simple that anybody can do it and especially when the majority of mutual funds and professional money-managers fail to match the market’s return.

It really is simple; it is a strictly mechanical trade. One of its most important attributes is that it avoids the problems that most often harms performance: the emotions of fear or greed.

Wait a minute. We're at record highs. If you sell right now, you could be missing out on a big gain. That's greed talking. Stocks have churned higher in a broad trend channel for more than four years. Since the market dropped sharply in late 2011, this uptrend has found a steeper slope--tightening toward the new highs. The market has dodged some bullets over the past several months. But the underlying trend has proven so far that it is stronger than the soft economic data. Unless price says it's time to pound sand, there's no reason to get out of the way. Again, that's greed talking.

And if you are like most investors, you will listen to that greedy voice inside your head. So, I have a way to help you.

Yale Hirsch, the publisher of the Stock Traders Almanac came up with the Sell In May strategy in the 1970s; he updated the idea in 1999. Hirsch back-tested 51 years of data and found a very simple way to double the performance while eliminating 61% of the market risk. Ready?

Put a MACD indicator on the chart and use that to time you exit and entry. MACD stands for Moving Average Convergence Divergence. So you pull up a chart of the S&P 500, click on the MACD technical indicator, and if it turns negative any time around May 1, you get out. And if it turns positive any time around November 1, you get back in. Over the last 15 years this simple but effective improvement resulted in entries as early as October 16 and as late as November 28, and exits as early as April 20 and as late as May 16. The Sell in May strategy beats the overall market, and the MACD addition beats the Sell in May, by about a double.

The MACD indicator uses three exponential moving averages: a short or fast average, a long or slow average, and an exponential average of the difference between the short and long moving averages, which is used as a signal line. MACD reveals overbought and oversold conditions for securities and market indexes, and generates signals that predict trend reversals with significant accuracy. Gerald Appel is the guy who came up with MACD and he recommends an 8-17-9 MACD to generate buy signals and a 12-25-9 MACD to confirm a sell signal for a stock, which has had a strong bullish move. MACD turns bullish when it moves above its signal line or into positive territory, whichever comes first. MACD turns bearish when it moves below its signal line or into negative territory.

Buy Signal Recap:

1. Buy on October 16th if MACD is bullish.

2. Wait for bullish MACD signal if MACD is not bullish on October 16th.

Sell Signal Recap:

1. Sell on April 20th if MACD is bearish

2. Wait for a bearish MACD signal if MACD is not bearish on April 20th.

The six month cycle is not infallible. While adding MACD improves the historical results, it does not mean every signal will work.

And then if you do sell in May, where do you go? Just take a vacation; go to cash. Relax.

Chicago PMI came in weaker-than-expected at 49, showing a contraction in Midwest manufacturing activity in April.

Consumer confidence rebounded in April as Americans felt better about the economy's short-term prospects and their own incomes. The Consumer Confidence Index rose to 68.1 this month after dropping to 61.9 in March. The percentage of respondents who expected business conditions to improve over the next six months increased to 16.9% from 15% in March. In addition, the percentage of consumers who expected increased income rose to 16.8% from 14.6%.

Home prices in the nation’s largest American cities continued their strong gains in February. The Standard & Poor’s/Case-Shiller home price index of 20 American cities rose 0.3% over the prior month and was up 9.3% over February 2012. All of the cities covered by the index have risen year-over-year for two consecutive months. Phoenix posted particularly strong gains, up 23% over the year. California metro areas also gained over the year. The San Diego area was up 10.2%, San Francisco 18.9% and Los Angeles 14.1%.

The homeownership rate declined to 65% in the first quarter, down from 65.4% during the same period in the prior year. The homeownership rate represents the number of households that are occupied by owners divided by the total number of occupied households. The rate has declined fairly steadily for years, and is down from a peak of 69.2% in 2004, when the housing market bubble was ramping up.

The US Treasury said it now expects to pay off $35 billion of debt in the April-to-June quarter, compared to an earlier projection, given in February, that it would have to borrow $103 billion. This will be the first quarter that Treasury has paid off debt since April-to-June period 2007. Current CBO projections have the deficit dropping as low as 2.4 percent of GDP by 2014, under its 30-year average.

The two parties are miles apart on how to cut the deficit and national debt: Republicans want to slash spending even more. Democrats want to raise revenue.

And then there are the people who reject the entire premise of the current high-stakes fiscal fight. There’s no short-term deficit problem, they say, and there isn’t even an urgent debt crisis that requires immediate attention. Aided by a pile of recent data suggesting the deficit is already shrinking significantly and current spending cuts are slowing the economy, elements from the left and right are coming around to the point of view that fiscal austerity, in all its forms, is more the problem than the solution.

Even Goldman Sachs issued a report this week arguing that the drop in the deficit and relatively stable longer-term debt outlook should ease demand in Washington for more tightening. The Goldman analysts said even the current budget cuts would knock down growth by 2 percent, a number that would put the US back close to economic contraction.

Perhaps the story that might resolve the question is Japan; which for the past twenty years has been the story of flat-line growth and heavy debt. That changed recently with a new PM, Abe, and a new head of the Bank of Japan, Kuroda, and a new monetary recipe: double Japan's money supply in two years, and promise to ignite 2 percent inflation in two years, reversing nearly two decades of falling prices.  Kuroda's central idea is a more determined version of the Federal Reserve's "quantitative easing," which involved pumping vast amounts of money into the American financial system. His plan calls for the BOJ to roughly double annual purchases of Japanese government bonds to a half-trillion dollars and double its purchase of riskier assets in two years.

The aim is to push down long-term interest rates, encourage companies and individuals to borrow, and induce investors to seek higher returns, in the equity markets for instance.The BOJ's decision to deluge financial markets with cash sent the benchmark Nikkei Stock Average to a near five-year high. The yen went to a four-year low to around 100 to the dollar. The 10-year bond yield hit a record low 0.315 percent before rebounding.

Twenty years ago today a British computer scientist launched a website which was pretty basic, just text instructions for using the World Wide Web. It is worth noting because it was the first website and it opened the web to all, and now we're addicted to it. Twenty years, that's all.