‘Sell in May’ doesn’t always work – but technical analysis is often right

It’s not exactly Shakespeare, but it could very well apply to the 2022 version of the old investment adage, “sell in May and go away”

If you sold in May,

And went away

You might get burned in the finale,

Of a late summer rally

Past the halfway point of August, the US stock benchmark S&P 500 is up 2.34 per cent since May 1. Conversely, the Canadian benchmark S&P/TSX Composite is down 3.13 per cent over the same period.

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

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

In a client note from early May, Ryan Detrick at LPL Financial pointed out that since 1950, the period between May and October produced an average return of 1.8 per cent for the S&P 500. That compares to a 7.1 per cent average return during the other six months.

He also noted that over the past decade, the S&P 500 was up nine out of the last 10 years from May to October, with an average return of 5.7 per cent.

Of course — as the regulatory-required saying goes — past performance is no guarantee of 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.

USING TECHNICAL ANALYSIS IN YOUR PORTFOLIO

Technical analysis basically boils down to predicting the future by studying the past. It’s based on the assumption that most human activity is predictable and the past will likely be repeated.

Technical analysts evaluate securities through statistics generated mostly by market prices and volume over different periods of time. There are several different technical methods and tools to predict market trends, thanks in part to the evolution of computer-assisted techniques.

One 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 flattening out large fluctuations and establish support levels on the lower end and resistance levels on the high end. The skill for the analyst lies in the ability to choose time periods and other criteria to get the most accurate read.

Unlike fundamental analysts, technical analysts do not attempt to quantify a security’s intrinsic value. A fundamental analyst studies the actual nature of a security, while a technical analyst is not concerned with fundamentals such as corporate profits, supply and demand, or quality of management. The technical analyst believes that sort of information is already priced into the market.

Although technical analysis is right more times than it’s wrong, it’s far from right all the time. There are no technical investing mutual funds and few pure technical portfolios to compare with fundamental or value funds.

Most technicians are part of big institutional investment teams that employ a mix of styles to find whatever works best.

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

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