One of the most over used cliches in the stock market, in my opinion, is “go away in May”. First of all, it’s simply bad investment advice. Since 1950 on the S&P 500, the May 1st to July 17th period has produced annualized returns of 6.00%. So if you decide to “go away in May”, where will you park your long-term money in today’s environment and beat 6%? Granted, that 6% return is not guaranteed, but it is the historical return for the period listed above and it’s not bad considering that a 10 year treasury note yields 2.95%.
A better piece of investment advice, based on history and my opinion, is to go away on July 17th. One other important fact that the “go away in May” folks overlook is that strategy would completely fail to participate in the Russell 2000’s best monthly performance relative to the benchmark S&P 500 (June). Furthermore, since 1987, the Russell 2000 has produced annualized gains of 14.36% during the month of May. Where will you find a better alternative?
Over the past 20 years, one of the NASDAQ 100’s best performing stocks has been Vertex Pharmaceuticals (VRTX). It has gained roughly 30% per year over two decades and is approaching its absolute favorite two months of the year – May and June. These two months have produced average gains of 9.8% and 7.9%, respectively. Those are nice annual gains for a portfolio, much less monthly gains. May and June represent 17% of the year, but nearly 60% of VRTX average annual gains. VRTX shareholders would rarely have benefited from the “go away in May” mantra.
The chart on VRTX is a bit misleading as the stock has struggled mightily over the past 5-6 weeks, but looking at the following chart might lead to a different view of VRTX:
Despite the recent weakness, VRTX has successfully printed higher highs and higher lows in 2018, something that cannot be said for many of its biotech brethren. The hidden gem here lies in the fact that the VRTX:$DJUSBT has been rising for five months. Rotation within biotechs favors VRTX. The problem isn’t with VRTX, it’s with the biotech space in general.
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Therefore, I’d keep a very close eye on biotechs. Should that group begin to outperform the benchmark S&P 500, it’s quite likely that VRTX will be able to once again enjoy its two favorite months of the year, May and June.
Happy trading!
Tom
