Sell in May and go away?

Date: May 2, 2018

Following the recent rally in March, the question on most investors’ minds is whether this is simply a counter trend relief rally or a continuation of the longer bull market we have seen since 2009.

My expectation is the former and that the markets are likely to start selling off again as we move through the year. There is little potential news flow that could drive stocks or corporate debt higher over the next few months and, given valuations and downside risks, see little point to chase these markets. In terms of asset allocation, being marginally underweight risk assets would appear prudent.

“Sell in May and go away’ is a well-known trading adage that warns investors to sell their stock holdings in May to avoid a seasonal decline in equity markets. The sell-in-May-and-go-away strategy is where an investor sells his stock holdings in May and gets back into stocks in November, thereby avoiding the typically volatile May-October period. Some investors find this strategy more rewarding than staying in the equity markets throughout the year’’. – Investopedia, the online investment reference.


Whether or not investors should follow the advice above is of course debatable and dependent on the individual’s risk preferences, investment horizon and tolerance for volatility. After all, the other famous saying “as goes January, so goes the year’’ which posits that January’s market movements will be a good barometer of the remaining 11 months doesn’t appear to be playing out since there was hardly any volatility that month compared to the wild gyrations seen in February, March and April.

Since then, there have been numerous developments of significance, particularly in April when the US 10-year Treasury yield crossed the 3% level for the first time in 4 years, when worries emerged about regulation of technology/social media companies like Facebook because of privacy concerns and when relations between North and South Korea improved drastically when leaders of the two countries met at the end of the month.

In the local market too there were many incidents to discuss; however, although these were mainly company-specific some of them nonetheless had the potential to impact the overall market via their effect on investor confidence.

But if there was one single macro event that probably exerted the single largest influence, it was the eruption of US-China trade war worries, not just because of the impact on global growth, but also because of the constant contradictory news flow out of the White House.

April started with Amazon being accused by US President Trump of receiving preferential treatment from US postal services, a move seen as an attack on the company’s owner Jeff Bezos because of he also owns the Washington Post, which is well-known for being critical of Trump. On 2 April, the Dow Jones Industrial Average plunged almost 2 per cent, also affected by news that China had announced tariffs on 128 US products.

A few days later on 6 April, Trump tweeted that the US would impose tariffs on US$100b worth of Chinese imports, sending stocks reeling. US Treasury Secretary Mnuchin was quoted as saying “there is a potential of a trade war’’.

On April 9, Wall Street was hit by news that Mr Trump’s personal lawyer’s office had been raided by the FBI, though some relief came when Mr Trump hinted at a trade deal with China and then praised a speech made by China’s leader Xi Jinpeng. At this stage, the 10-year yield stood at around 2.8%.

Over the course of the following three weeks, the US market moved in tandem with pronouncements from the US administration about trade with China, though no clear picture emerged as to what the exact measures would be. There was also other negative news to contend with – on 20 April, Taiwan Semiconductor Manufacturing forecast weak smartphone demand, news that brought pressure to bear on related tech stocks. On that day, the 10-year yield closed at 2.96%.

On 25 April, the 10-year yield jumped 4.3 basis points to 3.026%, the highest since Dec 2013. On the same day, the 2-year yield rose to a 10-year high of 2.5%. The former closed the month at 2.955%  whilst the latter ended at 2.492%. An inverted or flattish yield curve is sometimes said to predict a forthcoming recession.

For April, the Straits Times Index gained 186 points or 5.4%. Much of this has come courtesy of the three banks – on Monday, DBS’s better-than-expected results helped push the index up almost 37 points.

Turnover has improved, staying consistently above the S$1b mark daily, with about S$1.6b done on Monday, the last trading day of the month when funds tend to rebalance their portfolios, usually to make themselves look good.

On the local corporate front, Datapulse Technology held a shareholders’ meeting on 20 April at which the incumbent board managed to keep their seats and gain approval for a controversial plan to diversify into the hair care business.

Trek 2000 International found itself embroiled in controversy when a forensic audit report highlighted possible fake sales, forgery, fraud and round-tripping. SGX has instructed the company to convene a shareholders’ meeting to vote on whether certain key Trek executives should continue in their current capacities.

Financially troubled commodities trader Noble Group was in the news constantly throughout the month. After SGX intervened, Noble dropped a contentious clause in its restructuring plan that would have effectively forced shareholders to approve that plan. The revised plan was then endorsed by Noble founder Richard Elman. As the month ended, the company found itself embroiled in a series of legal challenges levied by substantial shareholder Goldilocks Investment.

Midas Holdings, which operates in the China railway sector, on 16 April announced a 334m yuan shortfall in the bank account of its subsidiary Jilin Midas Light Alloy. The company is currently under investigation by the Commercial Affairs Department.

The US Federal Open Markets Committee meets this week to determine the fate of US interest rates and the market will be watching closely for clues on the number of rate hikes for the rest of the year.