“Sell in May” Doesn’t Always Work – But Technical Analysis Is More Right Than Wrong

It’s not exactly Shakespeare, but it could very well apply to the 2022 version of the old investing adage, ‘sell in May and walk away'”

If you sold in May,

And went away

You might get burned in the finale,

From a late summer rally

After mid-August, the US S&P 500 stock index has risen about 3% since May 1. Conversely, the Canadian benchmark S&P/TSX Composite fell about 3% over the same period.

The “sell in May” strategy is a welcome solution for pandemic-weary traders who want to close up shop and head to the cottage. But they might leave money on the table for ambitious interns.

Although the period from May to October is historically weak, it produces positive returns most of the time.

In a client note from early May, Ryan Detrick of LPL Financial pointed out that since 1950, the period between May and October has produced an average return of 1.8% for the S&P 500. This compares to an average return of 7, 1% during the other six months.

He also noted that over the past decade, the S&P 500 has risen nine of the last 10 years from May to October, with an average return of 5.7%.

Of course, as the regulatory saying goes, past performance does not guarantee future results. However, it is a simple example of how technical analysis can project the likelihood of something happening in the future and function as a final check on just about any investment we make.

USE TECHNICAL ANALYSIS IN YOUR PORTFOLIO

Technical analysis is basically predicting the future by studying the past. It is based on the assumption that most human activities are predictable and that the past is likely to repeat itself.

Technical analysts evaluate securities using statistics generated primarily by market price and volume over different time periods. There are several different technical methods and tools for predicting market trends, thanks in part to the evolution of computer-aided techniques.

An example familiar to many is the moving average, which tracks the average price of a security over a specified period of time. The moving average is used to spot trends by smoothing out large swings and establishing support levels at the lower end and resistance levels at the upper end. The skill of the analyst lies in his ability to choose time periods and other criteria to obtain the most accurate reading.

Unlike fundamental analysts, technical analysts do not attempt to quantify the intrinsic value of a security. A fundamental analyst studies the true nature of a security, while a technical analyst is not interested in fundamentals such as company earnings, supply and demand, or the quality of management. The technical analyst believes that this type of information is already priced into the market.

Although technical analysis is right more often than it is wrong, it is far from right all the time. There are no technical mutual funds and few purely technical portfolios to compare to fundamental or value funds.

Most techs are part of large institutional investment teams that use a mix of styles to find what works best.

For the average investor, there are many online technical analysis tools that could be part of your portfolio.

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