Sell in May and … miss a nice rally

John Shmuel May 1, 2012 – 9:37 AM ET | Last Updated: May 1, 2012 12:01 PM ET

Fotolia

Spring flowers often signal the time to clean out your portfolio.

• Comments
• Email
• Twitter
• in Share3

If you plan to sell in May and go away this year, you might miss a nice rally in the TSX’s energy and materials sectors, says one analyst.

Sid Mokhtari, technical analyst with CIBC World Markets, said in a research note that technical data shows the S&P/TSX Composite has gotten most of its spring selling out of the way already.

“We believe that the old saying ‘sell in May and go away’ should prove wrong for the TSX,” he said. “In our opinion, most of the selling in Canada is already behind us.”

Mr. Mokhtari said that both the energy and material sectors, which account for roughly 45% of the TSX’s weighting, should be the front runners. His analysis shows that the two groups of stocks have the best risk/reward profile. Energy in particular looks oversold when looking at the lower range boundaries of the sector seen in the past few years.

The outlook isn’t so picturesque for another big component of the TSX — financial stocks. Mr. Mokhtari’s analysis suggests banks and insurers will likely remain range-bound at best. Financials account for about 31.5% of the TSX, but offer a weaker risk/reward profile than energy and materials, Mr. Mokhtari said. If there is a plus side, however, it’s that financials should have a shallower correction if markets do end up selling off in May.

For those investors still set on going away this month, Mr. Mokhtari does acknowledge that historically, the TSX has in fact tended to post dips in May.

“The data back-test confirms the general consensus on poor seasonality,” he said.

Mr. Mokhtari, however, warns investors about the risks of falling into patterns.

“The more investors subscribe to this philosophy, the less effective it becomes (investors tend to be prepositioned ahead of the news/season for the outcome probability),” he said.