The old adage of selling in May has started its mantra in the media. Unfortunately, it is an outdated theory which has not come to fruition over the past few years. Market timing does not work and various academic studies have concluded this finding. With global investing, diversification, and rebalancing on a discipline basis you will have less chance of underperforming and missing opportunities.
I have been examining various valuation measures that are used in measuring markets. There is the Fed Model, Tobin’s Q, Spiller’s CAPE, Hussmann’s P/E and VLAP. The problem with these is that they can tell you how far the market has moved but not really if it is overvalued and when you should invest.
There is a debate going on right now on how overvalued we are based on the above mention measurements. The problem is that the signals are mixed resulting in a useless indicator. Fed Model is very attractive for stocks; however the others result in different degrees of over valuation.
Since my job is to adjust not predict markets, speculation on which one is right is a losers game. The monetary is very strong right now with interest rates at historical lows. This should give us some comfort from the “sell in May and go away” theory. The psychologypart of the market is too complacent with the individual investor staying out; waiting for the next pullback to board the train.
Rebalancing and some spring cleaning of portfolios is what we are doing. This is not timing or getting out. Just proper portfolio risk management to ADJUST to the sector rotation that is going on by the institutional investor community. To simplify “buy low, sell high” it always worked for me.