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"Sell What in May and Go Away" Chart Work

09/10/2013

Each year as the calendar approaches the month of May, many in the investment community suggest it is time to “sell equities in May and go away.” However, in 2013, the optimal investment strategy aligned with “sell in May and go away” was to sell U.S. Treasuries.

The Treasury sell-off has impacted other domestic and global asset classes. Some of the impact can be viewed as cyclical, while others maintain a more secular slant. To gauge whether the impact is cyclical or secular, investors should pay attention to the following performance charts.

U.S. 10-Year Treasury (Figures 1 and 2)

Best case example for “sell in May and go away;” a well-defined trend that is likely to continue and targets the 3.25% breakdown level from the middle of 2011 (see Figure 2).

Figure 1 U.S. 10-Year Treasury 2013
9-10 Terranova 2.1
Source: Bloomberg

Figure 2 U.S. 10-Year Treasury 2010-2013
9-10 Terranova 2.2
Source: Bloomberg

S&P 500® Index (SPX) (Figure 3)

Sell in May and go away? The SPX has flirted with confirmation of that strategy during the summer. However, a well-defined bullish trend for 2013 and a series of consecutive higher lows suggest the strategy is flawed for 2013.

Figure 3 S&P 500 Index 2013
9-10 Terranova 2.3
Source: Bloomberg 

NASDAQ 100 (NDX) (Figure 4)

The NDX underperformed its U.S. index peers in the early part of 2013. However, recent strong price action and a new yearly high on September 9 provide evidence that “buy in May and go away” is how investors should view the NDX.

Figure 4 NASDAQ 100 (NDX) 2013
9-10 Terranova 2.4
Source: Bloomberg

U.S. Dollar Index (Figure 5)

Since May, the U.S. dollar has retraced much of its first quarter appreciation despite rising rates and looming FOMC tapering. Investors should watch its direction closely over the coming weeks, as it will provide insight toward sector outperformance over the duration of 2013.

Figure 5 U.S. Dollar Index 2013
9-10 Terranova 2.5
Source: Bloomberg

MSCI Emerging Markets Index (MXEF) (Figure 6)

"Sell in January and go away" appears to have been the correct cyclical strategy for the MSCI. Recent price action alerts to a recovery attempt from the June low.

Figure 6 MSCI Emerging Markets Index (MSCI) 2013
9-10 Terranova 2.6
Source: Bloomberg

Oil and Gold (Figure 7) 

Gold has traded similar to the MSCI “sell in January and go away strategy.” In contrast, spot oil established its yearly low in April at $85.61 and has advanced nearly $25 since.

Figure 7 Spot Oil and Gold 2013
9-10 Terranova 2.7a

9-10 Terranova 2.7b
Source: Bloomberg

Taxable Fixed Income ETFs (Figure 8)

As an example, the following taxable fixed income ETFs are presented to display year-to-date overall trends for municipal bonds (MUB), high yield bonds (HYG), and investment grade bonds (LQD).

Ishares Muni Bond ETF (MUB) 2013
9-10 Terranova 2.8a
Source: Bloomberg

Ishares High Yield Bond ETF (MUB) 2013
9-10 Terranova 2.8b
Source: Bloomberg

Ishares Investment Grade Bond ETF (LQD) 2013
9-10 Terranova 2.8c
Source:  Bloomberg

MSCI U.S. REIT Index (RMZ) (Figure 9)

Since Federal Reserve Chairman Ben Bernanke hinted at asset purchase tapering on May 22, the U.S. REIT market has sustained a decline below all of its three major moving averages.

Figure 9 MSCI U.S. REIT Index (RMZ) 2013
9-10_Terranova_2.9
Source: Bloomberg 

Figure 10 SPX Sector Performance 2013

Symbol

Sector

Year to Date

Third Quarter

XLV

Health Care

+26.65%

+6.09%

XLY

Consumer Discretionary

+24.73%

+4.91%

XLF

Financials

+22.21%

+3.01%

XLI

Industrials

+19.84%

+6.52%

XLE

Energy

+17.34%

+7.03%

XLP

Consumer Staples

+14.76%

+0.96%

XLK

Technology

+11.44%

+5.12%

XLB

Materials

+11.06%

+8.72%

XLU

Utilities

+6.27%

(-1.38%)

Source: Bloomberg

Figure 11 XLV Health Care 2013
9-10_Terranova_2.11
Source: Bloomberg

Figure 12 XLY Consumer Discretionary 2013
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Source: Bloomberg

Figure 13 XLF Financials 2013
9-10_Terranova_2.13
Source: Bloomberg

Figure 14 XLI Industrials 2013
9-10_Terranova_2.14
Source: Bloomberg

Figure 15 XLE Energy 2013
9-10_Terranova_2.15
Source: Bloomberg

Figure 16 XLP Consumer Staples 2013
9-10_Terranova_2.16
Source: Bloomberg

Figure 17 XLK Technology 2013
9-10_Terranova_2.17
Source: Bloomberg

Figure 18 XLB Materials 2013
9-10_Terranova_2.18
Source: Bloomberg

Figure 19 XLU Utilities 2013
9-10_Terranova_2.19
Source: Bloomberg

Virtus Investment Partners provides this communication as a matter of general information. The opinions stated herein are those of the author and not necessarily the opinions of Virtus, its affiliates or its subadvisers. Portfolio managers at Virtus make investment decisions in accordance with specific client guidelines and restrictions. As a result, client accounts may differ in strategy and composition from the information presented herein. Any facts and statistics quoted are from sources believed to be reliable, but they may be incomplete or condensed and we do not guarantee their accuracy. This communication is not an offer or solicitation to purchase or sell any security, and it is not a research report. Individuals should consult with a qualified financial professional before making any investment decisions.