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Thursday, June 2, 2011

Sell in May and Go Away

The stock market adage “sell in May and go away” is based on the historical tendency for stocks to generate most of their positive returns during the six-month period from November 1 through April 30. Since 1950, the Dow has appreciated 7.4% on average during this favorable period, versus only a 0.4% average return in the May 1 through October 31 interval. It is not difficult to imagine this seasonal pattern playing out again this year. The stock market was very strong in the favorable six-month period just ended. The Dow gained 13% from November 1 through April 30. The same cannot be directly applies to KLCI, but eventually all stocks will move in the same direction at about the same pace.

However, should we really sell in May and go away.....only return to the stock market in November? I have been seeing that indeed May is not a good month to trade, but surprisingly my stocks portfolio (paper) gain actually increased another 3% from the peak in January, but after all the ex-dates of bonus issues and dividends, it drops 4%, which is just 1% from the peak.

So, if you are asking me, should we sell in May and go away.....I would not really agree. If we actually wanted to liquidate our holdings, we should do it ahead before the massive sell off which is a month back, on April. Technically, we should not be selling when everyone else is selling, right?

Judging by the previous years, from May until end of October, the volume usually not high, and retailers and getting more and more hopeless about the stocks recovery, thus selling even at discount as cash is preferred. On the other hand, I feel some stocks are worth to be accumulated during this time frame, and come November, the stocks portfolio might be benefited from the stocks rally (assuming there is a rally coming soon :p)

In the meantime, I will just hold on to stocks, which fundamental is still intact and stocks that continuously generate income via dividend to me replenish the cash that was already used to accumulate some growth stocks. This strategy works for me quite well last year, so, hoping to achieve the same thing this year although I lowered my financial goal this year to have stocks portfolio grow another 15%, while at the same time building healthier cash ratio.

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