« Option pit | Main | Kimchi goes all-American »

"Sell in May and Go Away" means working only two days a year

The idea of the adage is that the markets tend to be weak during the six month period from May through October is something that hits close to home for investors, given that we have just turned the calendar to the month of May. As we look back over the past couple of years, we find that May has ushered in some choppy, if not sloppy market behavior. For example, in 2012 the market (as measured by the S&P 500 (SPX)) peaked in April and the slid roughly -10.6% by early June, pushed higher in the later Summer months, only to experience an -8% starting in October. Point being, the "weak period" in 2012 was filled with periods of "fits and starts." And we all remember 2011, as it truly tested investor's mettle, as the SPX dove -21% from its peak in May to its October bottom. Tack this on to 2010 in which the markets experienced the "flash crash" in May, and it's not surprising that recent memories of the markets from May through October have left a bad taste in investors mouths. This is not to say that all May through October time periods result in major corrections or seismic market events, but it is a period of time that the market has not historically made great strides.

So as we hit May and the beginning of the historically "seasonally "weak" period for Equities, now is the time to think about positioning your portfolios accordingly. "Tilting" seasonally, using a combination of low-volatility and Technical Leaders ETFs, is a powerful way to do that.

Tom Dorsey, president and founder of Dorsey Wright ' Associates: The way it works is the Standard ' Poor's Low Volatility is exactly what it suggests. So, a low-volatility version of the S'P 500 would be more of a beta type of thing, and I want to add alpha to that, which would be PDP. Our PDP outperforms all of its bogeys:the S'P 500, the Equal Weight S'P 500, whatever you want to compare it to, but PDP outperforms it.

Dorsey (cont'd.): But in times of market consolidation, you want something in that combination that has some brakes, and that is the Standard ' Poor's Low Volatility Index. I can do the same thing with our PowerShares DWA Emerging Markets Technical Leaders (PIE), our emerging market ETF. It outperforms, hands down (VWO) and (EEM) which is another story unto itself. But why stop there? Take the PIE, let's say, and add it to (EELV), which is emerging market low volatility. Combining those two I have a better product.
I only mentioned our products because that's mostly what we have worked with in putting these into our backtester. And by taking these together, you're creating something that, working in combination, is better than any one of them by themselves. And you can create models in this way, and I think that's ETF alchemy. The "alchemy of ETFs" is combining things together to make better products, and that is really where this is going to end up being the biggest play for portfolios.
IU.com: You're saying that the ETF world is quite possibly saturated already. But this ETF alchemy frontier is going to afford a whole new impetus to allocate to the exchange-traded approach.

-- Olly Ludwig | IndexUniverse.com - Fri, May 17, 2013


TrackBack URL for this entry:

Post a comment

(If you haven't left a comment here before, you may need to be approved by the site owner before your comment will appear. Until then, it won't appear on the entry. Thanks for waiting.)