Sell in May and Go Away? No Way!

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One of the most widely-touted market calendar myths is that you should "sell in May and go away." This system apparently worked well from 1950 until about 2003. The Stock Traders Almanac has assembled data for all the mid-year swoons since 1950, but I'd like to bring you the data before 1950 and since 2003.

Last week, S&P investment strategist Sam Stovall took a new look at the "Sell in May" theory, taking the data back to 1933 (through 2009). He discovered that the S&P 500 index gained 2.5% on average during the months of May through October. More importantly, Stovall also looked at the 15 years like this one - the second year of a bull market - and he found that the May-October gains in all 15 of those instances (since 1933) averaged +5.5%. Only once (in 1971), did the May-October months deliver a major loss.

So far, so good, but I also want to look at what these calendar theories have done for us lately. It does no good if a system works in the distant past but then loses all validity once "everyone knows" about it. So I took a look at the last seven years in the Stock Trader's Almanac 2010 -- since the bull market of 2003 began -- and I found a nearly-identical track record in the two six-month periods -- i.e., cumulative gains of 13.75% and 13.91%, respectively:

A difference of just 0.02% per year is about as close as you can get to a dead heat. Last year, "Sell in May" certainly didn't work, since the S&P 500 gained 18.7% from May 1 to October 31, 2009 and it added another 14.5% in the six months ending April 30, 2010. But what about the NEXT six months?

Fundamentals Point to a Higher Stock Market

The major worries for investors now seem to be (1) the "euro crisis" centered in Greece, but in danger of spreading to the Iberian peninsula; (2) China's inflationary boom threatening to collapse into a deflationary bust, similar to the West's 2008 crisis, and (3) the Goldman Sachs ( GS ) war on Capitol Hill.

The first two dangers are actually good news for the U.S. stock market. Troubles elsewhere will help us to outperform Europe and Asia, supporting the U.S. bond, currency and stock markets as a safe haven. April is a good example of that trend. The U.S. market rose 1.5% in April vs. just 0.1% gain in the MSCI World Index. Emerging Asian markets only rose 1.1% in April, and China's market is down 14% year-to-date.

As for Goldman, that is a speed bump on Wall Street but a non-event to most Americans. The real meat of the stock market is corporate earnings and consumer spending. With the first quarter earnings season now nearly 70% complete, the 343 S&P 500 companies reporting through Monday have announced earnings 16% above analysts' forecasts and 65.4% higher than a year ago, according to Ed Yardeni. Almost 80% of all reporting companies announced higher year-over-year revenues and 79% posted a positive earnings surprise. It's now certain that last quarter will be the fifth straight positive earnings-surprise quarter.

Looking forward, analysts' consensus expectations for the annual earnings of the S&P 500 rose to a new high of $99.96 last week, up from $94.46 earlier this year. Although the S&P 500 was up only 1.5% last month, forward earnings estimates grew 6.1% in April. Ed Yardeni said this earnings season has delivered "shock and awe," that is, "Analysts were awed, while investors seemed to be in shock." By that, he meant that investors did not pour much money into stocks in April. But if the S&P 500's forward P/E merely stays at 13.3, and forward earnings reach $100 by the end of the year, the S&P 500 should rise to 1330.

For nearly a year now, I have pointed to May 2010 as a key month to determine if we are likely to suffer a double-dip recession in 2010. Specifically, this is the time we would know if we had either a clear recovery or a "double dip" recession. Well, the evidence is in. Consumer spending has now risen for six straight months. Real spending grew 3.5% in the first quarter, the best figure in three years, even surpassing the artificial "Cash for Clunkers" consumer spending splurge last August. That means the gains in the market are here to stay.

In addition, the Conference Board reported last Tuesday that U.S. consumer confidence rose to 57.9 in April vs. 52.3 in March, the highest level since September 2008 and substantially higher the economists' consensus estimate of 53.5. We also learned that consumer spending accounted for 80% of the 3.2% GDP gain last quarter, when consumers delivered their biggest spending increase in three years.

So don't buy into the old adage "Sell in May and go away." This year, May is the time to be buying.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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