Sell in May and go away Al­though the mar­ket is priced quite high at the mo­ment and the pos­si­bil­ity of a cor­rec­tion can­not be ex­cluded, Schalk Louw warns not to give in to your emo­tions, but to ex­er­cise proper dis­ci­pline when it comes to your long-term ass

Finweek English Edition - - MARKETPLACE -

no­tonly do we cur­rently face a stock mar­ket which is still trad­ing at a 20-year high priceto-earn­ings ra­tio (P/E), but we also find our­selves in the month of May. Many warn against the com­ing win­ter. “Be­ware of the cor­rec­tion,” they say, “Sell in May and go away.” But last year I wrote an ar­ti­cle in the 1 May is­sue on the same topic, and proved that May-sellers haven’t been quite as suc­cess­ful in the past. So what should we do? Should we be wor­ried?

We all know that mar­kets and share prices alike move up and down. When we look at th­ese trends in Graph 1 over the longer term (and by longer term, I mean decades), how­ever, two very im­por­tant de­tails be­come clear: The first is that the gen­eral trend is up. Stock mar­kets are trad­ing higher to­day than they did 10, 20 or 50 years ago. In fact, the mar­ket has de­liv­ered a re­turn of al­most 8% more than do­mes­tic in­fla­tion over the past 50 years. Sec­ondly, it may move up­wards, but it isn’t a one-way street and it def­i­nitely doesn’t come with­out pot­holes. Th­ese pot­holes or drops in mar­ket move­ments are also known as mar­ket corrections.

What is a mar­ket cor­rec­tion?

There is no one true def­i­ni­tion for a mar­ket cor­rec­tion, but be­tween traders, it usu­ally in­di­cates a drop of 10% or more from peak mar­ket lev­els. In to­day’s terms, this would mean a drop from our cur­rent 54 000 lev­els down to 48 600 and lower.

Such a mas­sive drop may seem im­pos­si­ble, but the truth is that the FTSE/JSE All Share In­dex has ex­pe­ri­enced at least 11 corrections of 10% or more since Jan­uary 2000.

It may sound like a lot, but the fact is that it isn’t such a strange oc­cur­rence at all. Ev­ery­one is fo­cus­ing on the last 12 months’ side­ways stock mar­ket move­ments, but few re­alise that we have al­ready ex­pe­ri­enced two corrections of 10% or more over the same 12-month pe­riod.

Is the mar­ket cheap or not?

The mar­ket def­i­nitely isn’t cheap at the mo­ment and at its cur­rent P/E of 21.4 times, it is trad­ing at its high­est lev­els when com­pared to its 20-year av­er­age of 14.8 times (see Graph 2).

So, sell in may and go away?

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