While there is some truth that markets are weaker during the northern hemisphere summer months, the costs of trading removes any advantage, writes Maya Fisher-French
There is a stock broker’s adage: “Sell in May and go away.” With a sustained rally of the markets since March, which has seen the All Share Index up 21% with 5% added to share prices since the beginning of May, is the market due for a breather?
Plexus group chairman Prieur du Plessis says investors are justifiably questioning the market’s next move.
“They are nervously wondering whether May will live up to its reputation as the advent of a corrective phase in the markets,” says Du Plessis.
But does the adage have any basis? Du Plessis says although figures vary from market to market, statistics over a long period of time show that the best time to invest in equities is from early November to the end of April and the bad period normally occurs from May to October. The full saying continues with “buy in September and harvest in spring”. This would be the northern hemisphere spring, so returns should be in the bag by April.
Du Plessis says a study of the MSCI World Index, a commonly used benchmark for global equity markets, reveals that good periods returned 6.5% per annum since 1969. Investors were in the red by -1.0% per annum over these years during the “bad” periods. Historical average returns in emerging markets tend to follow the same pattern.
“‘Sell in May and go away’ also holds true for the South African stock market,” says Du Plessis. “Returns from the FTSE/JSE All Share Index during the good periods from January 1960 to April 2009 were 11.8% per annum, whereas those from the bad periods were 5.2% per annum.”
The pattern of monthly returns reveals that the bad periods of the FTSE/JSE All Share Index are quite distinct.
Four of the six months from May to October have lower average monthly returns than the worst average return of the good six-month periods.
Does this mean that market timing can enhance your returns?
According to Du Plessis, if one had invested in the FTSE/JSE All Share Index during the good six-month periods and reinvested the proceeds in the money market during the bad six-month periods, the total return would have been 17.8% per annum. This compares with a total return of 17.7% for an investor who had stayed invested during both the good and bad six-month periods.
But these calculations do not take tax into account or every switch out of and back into the stock market involves costs, which would also reduce the returns for the market timer.
Using protection
By using a hedging strategy you can protect your investments without selling. This is where you would use instruments to short the market and if the market is depressed, you would make money, thereby offsetting your portfolio losses.
Andrew Kinsey of Global Trader says this is easily done if your portfolio replicates the All Share Index as you are able to buy a put option on the All Share Index or sell a Satrix contract for difference (CFD).
The put option route is fairly expensive. For example the September Future was trading at 19900 at the time of this article. If you wanted to buy protection at this level, it would cost about 7% of your share portfolio.
The market would have to fall by more than 7% to justify the decision. Kinsey says the expense reflects the right to walk away from the protection and not incur further losses should the market rally strongly.
Short-selling a CFD on the Satrix 40, which tracks the All Share Index, is a less expensive alternative, however if the market moves against you your losses can be unlimited. You would sell Satrix at the current price in the expectation that you would buy it back at a lower price.
If the market rallies you would have to buy Satrix back at a higher price. Single stock futures can be used in the same way.