Ignore Cute Platitudes; Invest on Fundamentals
Those who followed the old saying "sell in May and go away" this year are likely much poorer than if they had never heard those sage words. Check out the charts below to see how much they gave up (based on the S&P 500) depending on whether they exited at the end of April or the close of May.
Chart Sources: TradeStation,Forbes.com
Anyone who followed the advice was probably feeling smugly superior as the broad market bottomed in early June. They are not bragging about their 'Sell' decision anymore.
Of the 30 stocks in the DJIA, 90% (27/30) declined from April 30th to May 31st , some of them quite significantly. Twenty eight of the thirty (93.3%) were higher by last week's close than they were on May 31, 2012.
There were few earnings reports from these companies during the month of May. Almost all the declines were just market trending moves which made the shares fundamentally cheaper than they'd been before the sell-offs.
Logical investors would have seized the opportunity to get in at bargain valuations. Instead, momentum chasers and the 'Sell in May' crowd, egged on by constant media reminders of negative seasonality, were busy dumping at bad prices.
Many were raising cash simply to be able to buy later at what they expected to be lower levels. Most of them are still waiting on the sidelines, praying for another big pullback. Meanwhile, they have been earning mere basis points while the S&P 500 advanced almost 12% since May 31.
Trying to add alpha by timing the market usually proves futile over time. While everything works sometimes, nothing works every time.
I find that my cash builds up automatically as stocks I'm holding hit valuation-based sell targets. If there are no great values beckoning for reinvesting the money, my cash builds without my having to decide on that course of action.
Conversely, my cash hoard dwindles without conscious planning as it gets put back to work when shares look unreasonably cheap.
Right now, after the recent strong rally, I'm finding more sells than buys.
Disclosure: I am long CAT, XOM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.