Summer’s return is always a welcomed event and a reminder of how great it would be to travel around the world and follow summer forever. The 1964 surf documentary film, The Endless Summer, essentially followed two surfers doing just that: starting in their native California, they surfed beaches in South Africa, Senegal, Ghana, Nigeria, Australia, New Zealand, Tahiti, and Hawaii and showcased some of the most epic surfing and most beautiful wave footage to ever hit the silver screen. The seminal film went on to become a classic and took the sport’s appeal from a bunch of beach bums to the mass market, forever changing the culture of surfing.
While an endless summer would be perfect for surfing, it may not be great for the stock market. The old adage of “Sell in May and go away” is based on a phenomenon that the stock market has better returns between November and April than the May-October time period. According to a paper published by Financial Analyst Journal entitled “’Sell in May and Go Away’ Just Won’t Go Away,” between 1998 and 2012 “on average across markets and over time, stock returns are roughly 10 percentage points higher in November-April half-year periods than in May-October half-year periods.” One of the biggest reasons for the under-performance during this period is much lower stock market volume associated with market participant vacation time (much of the world is “on holiday” in August).
This summer may prove to fit the pattern as we currently find ourselves in a meaningful news “vacuum” between Q1 and Q2 earnings reports and the April and July Federal Reserve Bank monetary policy meetings. In times like this, it does not take much to agitate the market as we have seen with recent selloffs this week associated with Eric Cantor, the Republican House majority leader, losing the Virginia Republican primary election and new civil unrest in Iraq.
When you add very high “bullish sentiment” and low volatility to the mix, you get a combination that may be ripe for a potential pullback in the market. Regarding sentiment, we have the highest reading this year (similar to early January see "On January 20% + Moves & Sentiment") of investors identifying themselves as “bullish” according to the weekly American Association of Individual Investors poll:
A high percentage of bullish investors are—somewhat counter-intuitively—a bearish indicator. If most investors are bullish, there are only a few market participants left to buy stocks and push stock prices higher, which can lead to market declines.
Unfortunately we cannot chase the “endless summer” wave and think about the market and investment portfolios at the same time. Thankfully, if things get ugly in the market, we can imagine ourselves surfing the waves, laying back, and hanging ten!
Sources: American Association of Individual Investors|Bloomberg|Endless Summer|Financial Analyst Journal
Past performance is not indicative of future results.