(Don’t) Sell in May and (Don’t) Go Away?   

• The US S&P 500 and global stock markets have just finished two months of the best performance since the 1970s, with April showing the best performance on the S&P 500 since 2,000. March, trough to last Friday’s close, the DJIA is up 25%, S&P 500 is up 29%, NASDAQ is up 18%, Japan’s Nikkei 225 is up 27% and the MSCI EAFE is up 30%. The emerging divergence shows that the outperformance of the technology sector in the US has boosted the S&P 500, while non-US (EAFE) markets have responded very well to the US rally.
• This rally continued last week despite a delay in the release of US stress tests on 19 key banks as bank management (such as Citigroup and Bank of America) reportedly are debating the examiners’ findings that such banks would need significant additional capital. The market also shrugged off the not-so-smooth and clean bankruptcy of  Chrysler and the implications this will have on GM.
• But as we enter May, investors are wondering if the old “sell and May and go away” saw will apply in 2009. Over the past 58 years, the DJIA has averaged a gain of only 0.6% between May 1 and October 30 of each year, versus an average 7.1% between November 1 and April 30 of the following year.
• In Japan, the Nikke 225 has declined an average of 0.3% during this period over the past 25 years, with the worst decline being 2008, when the Nikkei 225 plunged 34.4% between May 1, 2008 and October 30.
• However, the rule does not appear to work as well coming out of major sell-offs like we saw in 2008. Coming off a new post-war low in April 2003, for example, the Nikkei 225 gained a robust 36.0% between May 1 and October 30 2003, and we suspect that 2009 is a similar situation, given the markets hit their major secular lows just this March.
• Coming off bear market lows in 2003, the Topix bank sector index surged 49%, while large numbers of stocks priced for bankruptcy doubled and tripled. We see a similar pattern for US stocks in the recovery rally from March 2009 lows. In Japan, the rally should continue to be led by the same international blue chips that were hammered by a strong yen and collapsing global trade.

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