Tuesday, 31 May 2011

The truth behind the popular adage markets "sell in may".

Sharp last week price falls were a reminder that the summer can be a difficult time for investors Photo: AP

Not surprising that after Glencore, trader more products of the world, publishes his prospectus of the oil price, silver, copper, cotton, and many other raw fell.


And a breakdown of what it was. The price of Tin fell more FP7 last Thursday. Silver, which has soared on the coat tails of gold, has lost about a quarter of its value in a stark reminder that commodity prices retreats can be you fast. The price of oil has suffered its largest fall of ever day in dollar terms.


There are many good reasons why commodities should have marked a pause to breathe. Price of entry are self-correcting to some extent, so should be expected that rising energy, metals and food in the last months would result in sales of gasoline falls to the United Stateslower than expected GDP in the first quarter, both sides of the Atlantic, worse that he feared figures without employment and oil stocks higher.


In the emerging world, which is the main source of global growth, rising inflation triggered a monetary tightening cycle which will inevitably be retain developing economies. And that begins to appear at the doors of the German plant, where the levels are lower than expected.


Your emollient President of the European Central Bank, Jean-Claude Trichet on interest rates Europe is contributing to (although it back-pedalled a little Friday). A falling dollar makes prices more expensive at the nonamericans, so it often raises prices lower.


The indiscriminate nature of the price falls also points to a generalised speculative foam blowing. With near record levels of optimism on the raw materials markets, liquidation of a pretty crowded trade was on the cards.


Despite fluctuations of this week, I think that the structural case for commodities remains strong. Share of world consumption of energy in China should increase of 10pc there is ten years to 25pc in 10 years. We are in the midst of a fundamental change in the balance between supply and demand for products which conceals the most cyclical factors at play last week.


That said, the trade-off between risk and reward continuous gets progressively less favourable plu the redevelopment in the price of raw materials. There is little doubt that 2003 was best time for sowing on raw that 2011, even if high real may be months or even years of absence.


Sharp last week price falls were, however, a reminder that the summer may be a moment difficult for investors, although as difficult as the popular adage "sell in May and disappear" could suggest. In a moment to idle last week, I decided to take in looking at the numbers behind this.


I did so by monitoring the performance of the FTSE 100 in the 1920s, dividing each year in May to September, summer period and an October to winter April. Overall, sell in May has worked to be a sensible strategy. Moving cash in the summer and to return to the market in winter could have paid during the period of 20 years by a significant amount. An investment of 100 books in the British market in 1991 would have pushed to £ 162 for a buy and hold Investor and £ 190 for someone following the sale in the method of May.


It is the theory.


In practice, I think that many investors could work. First, 10 20 summers saw the rise of the market (by up to 18pc in best year). Pass next to these gains would have been extremely painful and the temptation to abandon huge strategy. Second, the transactional cost of moving the market twice a year would have excluded a large part of all the benefits. Finally, the figures are strongly biased by the bearish market 2000-2003, in which most of the damage happened during the summers of 2001 and 2002. Strip the out and during periods of the approach only worked.


Purchase and sale in the season and with a giant as an indicator of otherwise market flotation are superficially attractive approaches, but in most cases, reality is messier than theory. Sometimes it works and sometimes it doesn't.


tomrstevenson@fil.com


Tom Stevenson is a Director of Fidelity International investment. The views are his own. Twitter@tomstevenson63.


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