The Six-Month Stock Market Timing Strategy (Guest Commentary)

By: Henry To | Tue, May 10, 2005
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Dear Subscribers,

As I mentioned on our discussion forum, I will not be writing this weekend's commentary. Instead, I have brought in David Korn of Begininvesting.com as a guest commentator. His current views on the stock market is more slightly bullish than mine - so judging from the emails that I got over the last week, some of you may disagree with what he has to say. However, his analysis has always been very good, and I urge you to read his commentary this week. His style is a little different to mine, although similar to me, he also mentions the popular sentiment indicators like the Investors Intelligence and the AAII surveys. David also has a tidbit on Bob Brinker towards the end of this commentary.

The heart of this commentary, however, is the "Six-Month Stock Market Timing Strategy" a.k.a. "Sell in May and Go Away." I urge all of you to read what David has to say - I certainly learned a lot about this strategy from reading his commentary, even though we hear about this strategy about ten times a week from the popular media. Anyway, thank you, David and enjoy!

First of all, I believe a little bit of introduction is in order: David is the author of a weekly financial newsletter which is sent via e-mail and is editor of the website, www.Begininvesting.com. His newsletter is focused on personal finance, stock market timing, and independent stock market analysis. He also provides a summary and interpretation of the radio show Moneytalk, hosted by Bob Brinker.

David's newsletter has been quoted on TheStreet.com, CBSMarketwatch.com, and he recently appeared as a guest on Paul Merriman's radio show, Sound Investing.

David offers a unique brand of market timing, and has been successful in identifying some major inflection points in the market. His newsletter has attracted a devoted following, and he prides himself on providing personal responses to every question he is asked. I respect David's work a lot and I have also previously been a guest commentator in his newsletter.

David Korn's Stock Market Commentary, Interpretation of Moneytalk (Bob Brinker Host), Financial Education, Helpful Links, Guest Editorials, and Special Alert E-Mail Service. Copyright David Korn, L.L.C. 2005

Web site: http://www.begininvesting.com/

May 7-8, 2005 Newsletter


MARKET NUMBERS AS OF FRIDAY, MAY 6, 2005

Dow: 10,345.40
Nasdaq: 1,967.35
S&P 500: 1,171.35
QQQQ: $35.87
10-Yr. Bond: 4.266%


DAVID KORN'S WEEKLY STOCK MARKET COMMENTARY: It was a good week for stock market investors. For the week, the Dow gained 1.5%, the S&P 500 gained 1.3% and the Nasdaq gained 2.4%.

This cyclical bull market remains in tact. It has only been about two months since the cyclical bull market closing highs. As you know, I like to keep tabs on how the market has performed since major inflection points. This helps get some perspective and insights into corrections, as well as stock market gains. Let's crunch some numbers.

STOCK MARKET DECLINES OFF OF CYCLICAL BULL MARKET HIGHS

DOW JONES INDUSTRIAL AVERAGE

Closing Bull Market High on March 4, '05: 10,940.55 Close this past Friday, May 6, 2005: 10,345.40 Percentage Decline from Closing High to Present: 5.44%

S&P 500 INDEX

Closing Bull Market High on March 4, '05: 1,225.31 Close this past Friday, May 6, 2005: 1,171.35 Percentage Decline from Closing High to Present: 4.41%

WILSHIRE 5000

Closing Bull Market High on March 7, '05: 12,073.60 Close this past Friday, May 6, 2005: 11,538.65 Percentage Decline from Closing High to Present: 4.44%

NASDAQ COMPOSITE

Closing Bull Market High on December 30, 2005: 2,178.34 Close this past Friday, May 6, 2005: 1,967.35 Percentage Decline from Closing High to Present: 9.69%


What do the foregoing numbers tell us? For starters, looking at the broader indices (Wilshire 5000 and S&P 500), the correction is about the same, in the 4.4% range. The Dow, Wilshire 5000 and S&P 500 all reached their cyclical bull market closing highs within one trading day of each other (Friday, March 4th for the Dow and S&P 500, and Monday March 7th for the Wilshire 5000).

It also bears noting that the market has basically traded sideways for about 6 weeks. Although it has seen its share of volatility on a day-to-day basis, the indices are all just about where they were trading at on March 24, 2005. A covered call strategy would have worked nicely over the last six or so weeks.

The Nasdaq remains lower by a little more than double the broader market index which is consistent with what I have observed in comparing it to past corrections at this stage in the bull market.

Looking at the benchmark S&P 500, the market has undergone a 4.41% correction from its highs. My analysis of the last four cyclical bull markets in the 1966-1982 secular bear showed that the largest corrections come in the range of 10%-16%. Absent that type of correction, you are left with retrenchments that usually aren't greater than a few percentage points, typically capping out in the 4%-7% range. We are right in that range now. If you would like to receive my study of the last four cyclical bull markets, simply e-mail me and I would be glad to send it to you.

The technical action in the market has also seen an improvement of late. For those whose eyes are glazing over, I am referring to what is referred to as market internals. For example, the ratio of advancing to declining issues has been rising, as has the New High New Low Index on the New York Stock Exchange. This is a bullish sign for the market.

Investors also seem to be willing to take more risk in the market, which usually propels the share price of faster growth companies. Evidence of that can be seen in the Nasdaq's out performance this week and the fact that the Russell 2000, an index of small cap stocks, rose 3.0% this week. Even more telling is the fact that individual "riskier" sectors, like the Internet and biotechnology sectors, have seen nice moves since the beginning of this month. For an article that deals with this, check out "Sector Watch: May's Early Winners" which you can read here:

http://tinyurl.com/aydl3

The market action over the last 6 weeks is encouraging as there has been a steady shift in investor sentiment from bullish to bearish. From a contrarian standpoint, this bodes well for the future of the market. Each time we get this extreme bearish sentiment, the market tends to rally sharply, although the extent of each rally has varied widely. Let's take a look at a few of the sentiment data points to show you what I am talking about.

SENTIMENT

There have been some very healthy numbers reported in the Investor's Intelligence Survey. The latest readings show that the number of bullish advisors stands at 43.5%, down from 44.0% last week and 48.4% the week before. The latest numbers are the lowest reading of bullish advisors since early August of last year. In the bearish camp, we had similar changes occur. Two weeks ago, the percentage of bearish advisors had stood at 26.9%. Last week, the percentage rose to 29.7% and in the latest readings, the percentage of bearish advisors rose to 30.4%, also the highest percentage of bearish advisors in many months. These are excellent numbers from a contrarian stand point. Using the formula [(bulls)/(bulls + bears)], the sentiment ratio is 58.86%. Contrast that to the sentiment ratio at the beginning of this year, when the ratio stood at 75.32% and you can see what I am talking about. The four-week moving average is 61.06%.

We saw the bulls take similar flight over the last few weeks in the poll conducted by the American Association of Individual investors. Specifically, the latest readings show that the number of bullish individual investors stands at 28.6%, down from 29.8% last week and 36.8% the week before. By contrast, two weeks ago, the percentage of bearish investors had stood at 32.9%. Last week, the percentage rose to 34.7% and in the latest readings, the percentage of bearish advisors rose to 44.9%. Using the formula [(bulls)/(bulls + bears)], the sentiment ratio is 38.91%. Whoa, that's low!

The options market also continues to register bearish readings which I think has helped contain the level of corrections we have seen in the market. The CBOE put/call ratio closed Friday at 1.07 - a very very high number given that the market was basically flat on the day. The 10-day moving average is at 0.98. The 21-day moving average is 1.01. Great numbers!

The so-called "fear" gauge, the new methodology Volatility Index (VIX), closed Friday at 14.05. It has fallen five of the last seven trading sessions, reflecting less expected volatility in the S&P 500 Index. The original formula VX0 closed Friday at 13.30.

According to AMG Data, equity funds reported net cash inflows of $1.065 billion in the week ended May 4, 2005, with $819 million going to non-domestic funds and $246 million going into domestic funds. The money continues to flow into stocks which is a good sign.

Overall, the sentiment picture is very favorable for the stock market.

EARNINGS AND VALUATION

According to Thomson First Call, the blended growth rate for companies in the S&P 500 is now 14% ahead of last year's first quarter and above the growth rate of 13.6% Thompson had projected a week ago. (The blended growth rate combines actual results reported to date with projected results for companies that have not yet reported). Even better news, is that at the start of the first quarter, the rate was expected to be 7.6% over the same period last year. Quite simply, earnings are looking up. Next week, there are 18 companies in the S&P 500 scheduled to release their results including some big names like Walt Disney, Wal Mart Stores and Cisco. Here is a link to the full earnings calendar for next week:

http://tinyurl.com/5xev

As of Friday, 437 of the 500 companies in the S&P 500 had reported earnings, with 67% reporting above analyst expectations. That is more than the average 59% that usually beat expectations. Moreover, companies are beating estimates by a margin of 4.9% above the historical average of 3.1% and above the 4.2% recorded last quarter. Very bullish news.

We now have a complete picture for 2004 fourth quarter earnings. According to Standard & Poor's, the twelve-month trailing operating earnings for the S&P 500 through the end of the fourth quarter of 2004 were $67.68 per share. Based on the S&P 500's close on Friday at 1,171.35, that would give the index a trailing P/E ratio of 17.30. Here is a link to the Standard & Poor's web page where you can download earnings information for the S&P 500:

http://tinyurl.com/g3i5

I only reference the 2004 earnings to give some perspective going forward. Last year's earnings are not really relevant anymore as we are now halfway into the second quarter of 2005. In the stock market, looking forward is what really matters as the market is a discounting mechanism.

As noted above, we already have most of the first quarter earnings reports completed. Current estimates from Standard & Poor's through the end of the first quarter anticipate operating earnings of $69.63. For the second quarter, earnings are estimated to be $71.11 and through the third quarter of 2005, the estimates are for earnings of $73.27. These estimates are up since I last crunched the numbers. I have previously written that I think it is reasonable to expect earnings this year to fall within the range of $68-$73 range. However, based on the strong earnings this quarter, I am raising my estimates to $69-$74.

When you translate these estimates into a valuation metric based on today's price levels, here is what you come up with:

Using an estimate of $69 (on the low side of the spectrum) for calendar year 2005 earnings, that would translate into a forward P/E ratio of 16.97.

Using an estimate of $71.11 projected by Standard & Poor's for the first two quarters of calendar year 2005 earnings, that would translate into a forward P/E ratio of 16.47.

Using the upper estimate of $74 for earnings, that would translate into a forward P/E ratio of 15.82.

The market's valuation went down slightly since I last calculated it. In periods of low inflation and steady economic growth, the market should be able to sustain a valuation metric of 18-19.

Working backwards, what do these projections tell us in terms of a potential price level we hope to get? If you applied a valuation metric of 18 times an estimate of $70, that would give you a price level of 1260 in the S&P 500. If you applied a valuation metric of 18 times an estimate of $74, that would give you a price level of 1332 in the S&P 500.

Got that? Looking for a price target of 1260-1332 in the S&P 500. That would represent a gain of 7.6% to 13.7% from today's stock market levels.

INFLATION AND EMPLOYMENT

As I am sure you heard, the Fed raised short term interest rates 25 basis points on Tuesday, raising its target for the federal funds rate to 3.00%. No surprise there to anyone that follows the market. The Fed left in its comment that the policy remains accommodative and it would continue to implement changes at a "measured" pace. The Federal Open Market Committee actually mistakenly left out a key sentence in their policy statement for about two hours before they corrected it. The sentence was an important one which read, "Longer-term inflation expectations remain well contained." That is a key point for not just the stock market, but the bond market as well. This link brings you to the FOMC's statement that was released following their May 3rd meeting:

http://tinyurl.com/cxna3

We are not due to get April's Producer Price Index and Consumer Price Index reports until May 17 and 18th respectively. However, economists pay close attention to the jobs reports because when there is heavy demand for laborers, employees can demand higher wages.

According to the April employment report, the U.S. added 274,000 nonfarm payroll jobs in April. The Labor Department also revised UPWARD the gains in February and March to add another 93,000 jobs. The unemployment rate remained unchanged at 5.2% in April. With the revised gains in February and March, the three-month employment gains averaged 240,000. This is significantly more than the roughly 150,000 or so that we need on average to absorb new entrants to the labor market. The muted action on Wall Street following this report might have to do with investors wondering whether the numbers were too "good" in that they might stir the Federal Reserve to be less "measured" in their monetary policy. Read the official employment report at this url:

http://stats.bls.gov/news.release/empsit.toc.htm

Gene Epstein, who writes the Economic Beat column for Barron's Magazine, points out that the employment numbers are almost identical to what we saw at the beginning of last year when the April 2004 report showed one-month gains of 288,000 and three-month gains of 236,000. Pretty darn close to this year's numbers eh? The streak continued last year until the summer doldrums stepped in. Mr. Epstein points out that three, even four month trends are fickle, and the 12-month trend is far more stable and "far less prone to being revised away."

Does that have you wondering what the 12-month trend is? Funny you should wonder, as I have the number handy. The 12-month moving average has been rising slowly to a high of 185,000 through last month. That number is sure to raise eyebrows, especially if this 3-4 month trend turns into something longer. You can find Gene Epstein's column on page 36 of this weekend's Barron's, or online if you subscribe at this link:

http://online.barrons.com/


A SIX MONTH STOCK MARKET TIMING STRATEGY

(A David Korn Primer)

"Those who study market history are bound to profit from it."
- Jeffrey A. Hirsch, Co-Editor of Stock Trader's Almanac

"In the stock market, those who expect history to repeat itself exactly are doomed to failure."
- Yale Hirsch, Co-Editor of Stock Trader's Almanac

Introduction: Tis the season to be wary -- at least insofar as the stock market is concerned. This seasonal phenomenon lends itself to a form of stock market timing. Much of the data was originally collected by Yale Hirsch, editor of the Stock Trader's Almanac, but the phenomenon actually has much older roots. I opted to write this segment in a Q&A format trying to anticipate the questions you might have about the strategy.

Question #1: David, what the heck are you talking about?

Answer: What a great opening question. We could have used you at the Presidential debates. Essentially, there is a fascinating historical pattern showing that most of the stock market's gains occur during the time frame that begins November 1st and ends April 30th of each year. Conversely, the time period between May 1st and October 31st have generally not produced favorable returns in the equity markets.

Question #2: Isn't this referred to by another name?

Answer: Not just one other name, several. The first I ever heard of it, was a reference to the "Seasons in the Sun" strategy, presumably because it refers to the fact that you rotate out of stocks during the summer months. Another popular phrase for this strategy is the "Halloween Indicator" for the obvious reason that the strategy turns on Halloween each year, at least as celebrated in the United States. The Stock Trader's Almanac refers to it as the "Best Six Month's Strategy."

Some use an idiom to remind them what to do -- "Sell in May and Go Away." Indeed, investors have coupled the "Sell in May and Go Away" phrase with "but buy back on St. Leger Day." St. Leger Day refers to the date of a classic horse race that has been run every September since 1776. Even our northern neighbors in Canada have a saying for this phenomenon -- "Buy when it snows, sell when it goes."

Question #3: Do you have any statistics to show if this strategy works?

Answer: I knew you would ask that, and not just because I wrote the question. Well, maybe because I wrote the question. According to the Stock Trader's Almanac, if you invested in the Dow from November through April, and switched to fixed-income investments from May to October, over a 54-year period (1950-2004), your returns would have been quite dramatic. Using this strategy, a $10,000 investment in the Dow compounded from 1950-2004 produced a $492,060 gain in the November - April period, versus a loss of $318 for the May-October period.

Source, Stock Trader's Almanac. Yale Hirsch & Jeffrey A. Hirsch, Editors.

http://www.StockTradersAlmanac.com/

Question #4: But David, the statistics you cite are only for the Dow Jones Industrial Average which is only made up of 30 stocks. How has the broader-based S&P 500 performed under this strategy?

Answer: Almost as well. If you substitute the S&P 500 for the Dow, your $10,000 investment in the S&P 500 from May to October over that 54-year time frame would produce a gain of $349,165 versus just $7,102 for the November to April time frame.

Question #5: Has this seasonal strategy produced similar results in other countries?

Answer: I am so glad you asked. I refer you to an article that charted 19 of the major world markets over the last 30 years which encompass 97% of the total market capitalization of world equity markets. The result? The effect is pronounced. In every one of the 19 major markets studied, the greater part of returns for the year were concentrated in the November-April period. The findings were not insignificant. The unweighted average for the 19 markets was 10.5% during the November - April time frame, and just 1.4% for the May-October time frame. Is that incredible? It is pretty incredible if you ask me - and I suppose you just did! Check out the stats in the article entitled, "Beating the market" which is in PDF format at this link:

http://www.ucd.ie/~statdept/shanewhelan/beatmark.pdf

Question #6: David, has anyone looked at the data for the United States market beyond the 54-year period referenced by the Hirsch Organization?

Answer: Yes. In 1991, Michael O'Higgins looked at data from 1925 through 1989 and observed that 85% of the capital gains, excluding dividends, was earned in the Dow during the October 31st through April 30th time frame. Higgins came up with some inventive strategies to optimize it by using various proxies, such as the five highest yielding Dow stocks. Mr. O'Higgins' data was included in his book, "Beating the Dow" which has recently been updated. To learn more about it, this url brings you to the book's profile on Amazon.com:

http://tinyurl.com/apnv

Question #7: David, other than timers (the Hirsch Organization), and authors (O'Higgins), who are trying to make money off of this system, has there been any serious academic research done into this phenomenon?

Answer: You sound like my father, but that is an excellent question. In one fascinating academic study I found on this issue, the research showed that stock market returns were higher in the November - April period versus the May - October period in 36 of 37 countries studied. Did you hear me right? Or perhaps I should say, did you read me right? In 36 of 37 countries! This study concluded that the effect seemed to be strongly related to the length and timing of vacations, especially in Europe. This study was writ en by Ben Jacobsen from the Rotterdam School of Management, and AEGON Asset Management and is entitled, "The Halloween Indicator, 'Sell in May and Go Away': Another Puzzle." This link will bring you to an abstract of the article:

http://tinyurl.com/6e4tl

Question #8: David, what do you think could be causing this phenomenon?

Answer: I have seen many explanations for the phenomenon. Here are some of the reasons that are offered:

  1. As noted in the study I previously cited, during the summer months which occupy the worst 6 months for investing, everyone is on vacation, hence the lack of "buying" interest in the market.

  2. Investors tend to come into extra cash in the time frame between November 1st and April 30th due to year-end bonuses and distributions, income tax refunds, company contributions to retirements and profit sharing plans. Of course, this wouldn't explain why the phenomenon seems to work in other countries.

  3. The Infernal Revenue Code encourages retirement contributions between January 1st and April 30th.

  4. Mutual fund inflows tend to be less during the summer months. As reported by Aaron Task on TheStreet.com, since 1984, 62% of all mutual fund inflows have occurred between November and April. In the secular bear market that occurred during 1966 to 1982, monies invested solely in the May though October time frame fell nearly 85% on an inflation adjusted basis:
    http://tinyurl.com/apq6

  5. Banc of America Securities published an article at the following link which postulated that seasonal factors that influence economic data might help explain the seasonal cycles in stocks:
    http://tinyurl.com/azhc

  6. The Hirsch organization suggests this seasonality is based on the "habitual behavior of society, which extends to stocks." With respect to the poor performance during the May-November time frame, Jeffrey Hirsch notes that the second quarter tends to be weaker as the positive effects of holiday bonuses and the holiday retail sales period fade out, and a "spring cleaning mentality kicks in."

  7. A final explanation offered is a seemingly obvious one. This is a pattern that is widely recognized, and people follow it. Indeed, CNN Money had a front page article on April 29th (the transition day from the best six months) entitled, "Worst six months on Tap?" which you can read at the following link:
    http://tinyurl.com/azh9

Question #9: David, has anyone ever used a combination of technical analysis and market timing to improve on this strategy?

Answer: Funny you should ask, I was just preparing a response to that very question. What a coincidence.

Sy Harding, editor of Street Smart Report, and author of the book, Riding the Bear, uses the Moving Average Convergence/Divergence indicator (MACD) to try and enhance the Six Months Strategy by picking a better entry and exit point, instead of simply relying on the rigid May 1st and October 31st buy and sell dates. Using the MACD, the sell signal could come a day or even several weeks before or after May 1st, and the sell signal could come in the days or weeks before or after October 31st. Mr. Harding's system has been so successful, that he has calls it, the "Best Mechanical System Ever." Mr. Harding calls his strategy the "STS Portfolio." From 1998 through 2004, Sy claims that his STS Portfolio has produced compound returns of 127.7% versus 38.2% for the S&P 500. Stated differently, the STS Portfolio produced annualized annual returns since 1998 of 12.5% versus 4.7% for the S&P 500. Sy Harding has a fairly in depth discussion of this system on his web site which you can access at the following link:

http://www.syharding.com/sts.html

The Hirsch Organization over at the Stock Trader's Almanac are well aware that Sy Harding is marketing the Best Six Months strategy using the MACD indicator. In fact, they even reference his use of it on their web site at this link:

http://tinyurl.com/3b53v

Since they know a good marketing tool when they see it, STA now offers their own market timing newsletter based on their version of the MACD indicator using the Six Month Strategy. So, we have competing newsletter writers, all of whom want to have the better timing on the Best Six Months. Now we have some drama and competition.

Question #10: David, has the application of the MACD enhanced the Best Six Months strategy over the long haul?

Answer: The Hirsch Organization back-tested this method over the last 53 years. According to their research, applying the MACD signal produced what can only be characterized as astounding results. Instead of the $10,000 gaining $461,774 during the favorable period over the 53 years, the gain nearly tripled to $1,308,314! Moreover, the $1,625 loss during the worst six months deepened to $7,077 for those 53 years.

Source, Stock Trader's Almanac 2004, p.52. Yale Hirsch & Jeffrey A. Hirsch, Editors.

http://www.StockTradersAlmanac.com/

Question #11: David, has the MACD indicator triggered the Best Six Months buy this year?

Answer: Yes. In fact, you can apply the MACD that the Hirsch Organization uses by simply following their guidelines set forth in the link above. As for Sy Harding, he told me that his signal was triggered on April 20th and gave me permission to reference that in this newsletter.

Question #12: Does anyone think this six month timing strategy is hogwash?

Answer: Hogwash? What does that word mean? I refuse to answer that question, its hogwash.

Question #13: Ok, does anyone find fault in the best six months timing strategy?

Answer: Yes. The Schwab Center for Investment Research (SCIR) looked at this strategy and found that the S&P 500's average MONTHLY return was higher (1.2%) for the November to April period, and lower (0.8%) for the May to October period. Moreover, SCIR concluded that simply remaining fully invested in the S&P 500 outperformed a seasonal portfolio more than half of the time. SCIR concluded that "time in the market" is much more important than "timing the market" especially when you consider the transaction costs and tax consequences. Check out the SICR study entitled, "Market Folklore Under the Microscope: Does 'Seasonal Investing' Really Work?" which is posted at the following link, followed by some good discussion on this strategy:

http://tinyurl.com/4vjkx

Some argue that the Schwab study is flawed because they used the average monthly returns, rather than absolute returns as the Hirsch Organization uses. Just goes to show you can find two sides to every issue.

Question #14: David, a picture is worth a thousand editorial comments. Capiche?

Answer: Sure, I understand. Check out this "Chart of the Day" showing that the market has made the majority of its gains during the calendar months of November through April. The chart tracks the average yearly performance of the Dow since its inception in 1896 through 2005 which the chart's creator believes lends "credence to the old Wall Street adage, 'sell in May and walk away.'"

http://www.chartoftheday.com/20050504.htm?T

Question #15: David, how did the market perform during the last six months which was supposed to be the "Best Six Months?"

Answer: Not all that great. The Dow gained just 1.6% from October 31 through April 30th. The S&P 500 gained 2.4% during the same time frame. The Nasdaq actually lost 2.7% during that period.

Question #16: So much for the Best Six Months David. Does that mean that things are reversed, and we will now have the market do well during the May-October timeframe?

Answer: Now that is a question worthy of an aspiring newsletter writer who should be tracked by someone who monitors newsletter writers. Speaking of which, Mark Hulbert took up that very question in an article out last week. Mark studied the Dow over the last 108 years to determine if there was "any relationship between the strength of the market during the seasonally positive period and the market's return over the subsequent six months." His conclusion?

None. Nada. Zippo. On the 43 occasions since 1896 that the Dow lost ground during the October-end of April time frame, the Dow lost ground 30.2% of the time in the following 6 month period. In the 65 occasions that the Dow rose during the seasonally strong six month period, the Dow lost ground 36.5% of the time in the following six months. In Mark's words, "[T]hese two percentages are so close to each other that, statistically speaking, we must assume that they are the same. In other words, we should assume that the probability of the market declining over the next six months has nothing to do with the market's weakness during the six-month period just ended." I encourage you to read Mark Hulbert's article entitled, "Handicapping 'Sell in May..." which you can access at this url:

http://tinyurl.com/9u5t7

Question #17: David, what do YOU think about this strategy?

Answer and Conclusion: Did you have to put me on the spot? Ok, I will answer it. Frankly, I believe that there is merit to this phenomenon. Of course, it could just be a statistical anomaly, but if it is, that's one heck of an anomaly. Nevertheless, the phenomenon is so widely known in investment circles, its usefulness may be waning. There is also a bit of trying to outguess each other as to when the trigger points to enter/exit the market will take place. I wonder if the weakness we saw in the market toward the latter part of April was in fact people exiting the market in anticipation of the seasonal strategy and then we had a relief rally once we got to May 1st. You should also keep in mind that this timing strategy is actually pretty conservative on a risk-adjusted basis given that you are out of the market for half the year. Finally, like all timing systems, there is no "Holy Grail" when it comes to investing. I firmly believe that you should never rely on one single factor when analyzing any stock, timing system, or investment strategy in general. Nevertheless, I also think you can never have too many tools in your investment arsenal. All in all, I think the Best Six Months strategy is worthy of being aware of, and warrants consideration if you are adopting a timing approach to investing.

BOB BRINKER FIX

Bob Brinker took the weekend off with Larry Kudlow sitting in as guest host to Moneytalk.

If you are wondering how daBrink views this market, he is squarely in the bullish camp. Peter Brimelow, from CBSMarketwatch, has been keeping tabs on three advisors who all went bullish in March of 2003, which included Bob Brinker, Index Rx and Profitable Investing. In an article published Thursday, Mr. Brimelow reports that Bob Brinker and Profitable Investing remain bullish, whereas Index RX has turned bearish. Read his article entitled, "The third 'Bold Bull' stumbles -- again" at the following url:

http://tinyurl.com/ccbfu

And in case you missed it, Mark Hulbert discussed Brinker's Marketimer in an article published on April 29, 2005 which I referenced on my web site. In the article, Mr. Hulbert quotes from Brinker's Marketimer newsletter in which he wrote that his timing model currently "'suggests that the cyclical bull market remains intact. Although we believe a new cyclical bear market is inevitable at some point, we do not expect the current cyclical bull market trend to end until our stock market timing model turns bearish. We do not expect to see that happen anytime soon." Read the article entitled, "Crazy to be bullish?" at the following url:

http://tinyurl.com/dhwzx

For those keeping track, here is how the major market indexes have performed (excluding dividends) since Bob Brinker's timing model turned "favorable" based on the S&P 500 Index's close on March 10, 2003, and he recommended investors redeploy their cash reserves into a fully invested position by bulletin issued at 2:00 a.m. on March 11, 2003:

S&P 500 Index: Up 45.06% Dow Jones Industrial Average: Up 36.69% Nasdaq Composite: Up 53.89%

For those of you who also followed Bob's recommendation to invest anywhere from 20% to 50% of your cash reserves in the Nasdaq 100 (QQQQ shares), here is how those shares have performed based on various times Bob recommended that security:

October, 2000 (Original Recommendation using $83.12 as entry price): Down 56.85% January, 2001 (Second Recommendation using $62.44 as entry price): Down 42.56% March 11, 2003 (Third Recommendation using $24.06 as entry price): Up 49.39%

NEXT WEEK

Its a relatively quiet week in terms of economic reports in the coming week. We get International Trade on Wednesday, Jobless Claims and Retail Sales on Thursday. On Friday, we get Business Inventories, Import and Export Prices and Consumer Sentiment. This link brings you to the economic calendar for next week:

http://tinyurl.com/dvo84

[Henry's Note: Don't forget that Cisco will report earnings this Tuesday evening while Dell will do so on Thursday evening.]

FINAL THOUGHTS FROM DAVID KORN: Have a great week! - David

DISCLAIMER: The information contained in this newsletter is not intended to constitute financial advice and is not a recommendation or solicitation to buy, sell or hold any security. This newsletter is strictly informational and educational and is not to be construed as any kind of financial advice, investment advice or legal advice. Copyright David Korn, L.L.C. 2005.


 

Henry To

Author: Henry To

Henry K. To, CFA
MarketThoughts.com

Henry To, CFA, is co-founder and partner of the economic advisory firm, MarketThoughts LLC, an advisor to the hedge fund Independence Partners, LP. Marketthoughts.com is a service provided by MarkertThoughts LLC, and provides a twice-a-week commentary designed to educate subscribers about the stock market and the economy beyond the headlines. This commentary usually involves focusing on the fundamentals and technicals of the current stock market, but may also include individual sector and stock analyses - as well as more general investing topics such as the Dow Theory, investing psychology, and financial history.

In January 2000, Henry To, CFA of MarketThoughts LLC alerted his friends and associates about the huge risks created by the historic speculative environment in both the domestic and the international stock markets. Through a series of correspondence and e-mails during January to early April 2000, he discussed his reasons and the implications of this historic mania, and suggested that the best solution was to sell all the technology stocks in ones portfolio. He also alerted his friends and associates about the possible ending of the bear market in gold later in 2000, and suggested that it was the best time to accumulate gold mining stocks with both the Philadelphia Gold and Silver Mining Index and the American Exchange Gold Bugs Index at a value of 40 (today, the value of those indices are at approximately 110 and 240, respectively).Readers who are interested in a 30-day trial of our commentaries can find out more information from our MarketThoughts subscription page.

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