Sell in May and Go Away...?

"Sell in May and go away"?There’s an old adage on Wall Street called the Halloween indicator that says, “Sell in May and go away.” It refers to the belief that the period between end of October/beginning of November and April has significantly stronger growth than the other months. Will this saying prove true for 2011?

A bearish viewpoint – Those in favor of “Sell in May and go away” for 2011 * Since Halloween 2010, the S&P 500 is up more than 14%. In addition, in the past 25 months the S&P 500 is up more than 100%. Bears argue that we have come too far, too fast and a pull back in the stock market is warranted and should be expected. * The end of QE2. Bears point out to the strong correlation between stimulus and the rise in equities. When the Fed ceases the $600 million second round of quantitative easing next month, the stock market will recede. * High commodity prices. As prices for energy and food continue to rise, so too will corporate profits fall. Bears point to the fact that high commodity prices will be a huge hindrance to consumers as well. * Historically, the Halloween indicator has proven true – A $10,000 investment compounded to $527,388 for November to April in 60 years, compared to a $474 loss for May to October.

A bullish viewpoint – Those that disagree with “Sell in May and go away” for 2011 * The trend is your friend. Bulls point out that bears have been calling for a top for over a year now in the markets. Thus far it hasn’t happened and they don’t see the end in sight. * Throughout 2011 there have been many reasons for the market to justifiably pull back, here are just a few:

The violence in the Middle East and North Africa
The earthquake, tsunami, and subsequent nuclear emergency in Japan
Standard and Poor’s dropping it’s outlook to negative for US debt
Skyrocketing commodity prices
Rising inflation

In spite of all this, the S&P 500 is up 6.5% for 2011. Therefore, bulls point to the fact that if none of these major issues moved the market lower, why would anyone think the market is anything but strong?

* The Federal Reserve is committed to keeping rates extraordinarily low for an extended period of time. Most people think they won’t raise rates until 2012. Low rates are bullish for the stock markets.

* Historically, bulls point to historical data that stock prices rise 70% of the time during May through October when it’s the third year of a president’s term, as it is now for President Obama.

Thoughts?

*Courtesy of Matt Grossman - The Stockenthusiast