Sell in May, Keep Profits Away

Sell in May, Keep Profits Away

By Dr. Paul Price of Market Shadows

Cliches are fine to listen to but often become expensive when followed blindly.  All the major indices rallied in May and finished the month positive year to date. The DJIA is now the laggard, up just 0.85% since Dec. 31, 2013. The Standard & Poors 500 is the clear winner so far at plus 4.07% YTD.

The Nasdaq Composite’s weekly gain of 1.36% made up 86% of its total return in 2014.

YTD returns as of May 30, 2104


Market Shadows is ahead by 7.9% YTD and + 50.6% since we got our Virtual Value Portfolio rolling on Oct. 26, 2012.

VVP as of May 30, 2014

The other old adage, “Cash is king” has become meaningless in a ZIRP world. The only reason to hold cash today is for paying bills and taxes or as temporary parking between long-term investments.

Accelerating money creation by the world’s central banks makes the risk of being ‘in the market’ pale compared with the gradual destruction of buying power being engineered by the Federal Reserve, the European Central Bank, the Bank of Japan and the Bank of England.

In the ‘new normal’ Zero Interest Rate Policy [ZIRP] environment, fiscal prudence and deferred gratification are no longer rewarded. Instead, savers are penalized as public policies encourage immediate consumption. Wealth confiscation has been become a worldwide phenomenon as Central Banks hold interest rates down and rush to devalue their currencies.

Sovereign debt auctions have also been distorted. For example, Greece, Spain and Puerto Rico will not be able to pay back principal on their debts without rolling the debts over. But central banks and other shill buyers artificially prop up the demand side. Further, countries such as Iceland, Poland and Cyprus have blatantly stolen private wealth ‘for the good of the state.’ Other countries may follow these disturbing precedents.


In addition to cash being devalued and the risk of cash being outright stolen, government statistics (e.g. the CPI and GDP), which people rely on in making financial decisions, cannot be trusted. For example, the Q1 2008 GDP number was just revised dramatically lower six years after the fact. And newly adopted accounting gimmicks, such as counting R&D spending and earnings from drug dealers and prostitution in the GDP, are designed to bolster GDP numbers and allow for even more government borrowing.

Forget the Fed’s ‘taper talk.’ With over $17 trillion in national debt, plus some multiple of that in unfunded pension, social security and medical care liabilities, the Federal Reserve won’t voluntarily raise interest rates significantly. Higher rates would break the U.S. government’s budget. It could no longer bear debt service expenses at ‘old normal’ rates.

Fiat-based currency offers the least chance for holding onto true wealth. Stocks are the best alternative because they are liquid and can be marked-up as paper money is marked-down.

We are in uncharted economic territory and past the point of no return.

Enjoy the fruits of your labor while you can. Invest wisely and hope the day of reckoning comes later, rather than sooner.


Other People's Luck



The following section was added after initial publication:

When currencies hyper-inflate, stocks tend to go wild to the upside. Current examples: Venezuela & Argentina.

Official inflation numbers may not reflect real life experiences.

Inflation Rates of Venezuela & Argentina

Venezuelan & Argentine Stock Market Returns   May 31, 2014

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  1. Excellent synopsis of the situation and most appreciated. It’s a balancing act between constantly lost value in cash vs. risk of a rapid market meltdown. I think we’re probably looking at 10% or more inflation (lost value on cash) annually for the next few years at least, but I’m no expert. What would you estimate for inflation, regardless of what the government claims it to be?

    I share Doug’s question about when you feel it is reasonable to temporarily get out of the market. We’re at a Shiller PE of 26 or so compared to the historical average of 15. At some point an artificially pumped up market will correct. It seems that since the Fed has prevented a lot of correction, this could add up to a big correction and/or a very long sideways market at some point. What would lead you to exit the market in advance of an anticipated meltdown? Or would you just trade down to bigger losers as the market dropped, not really exiting?



  2. So glad to have you back this week and publishing articles Dr. Price.

    For sake of conversation, a question: the macro factors you describe make a good case to stash no cash (or very little). What indicators will influence your thinking that the “day of reckoning” might be getting closer to allow you to adjust your positions?

    Thanks everyone,

    • Dr. Paul Price says:

      See my newly augmented article for further clarification about what I expect we’ll see eventually.

      Stocks might sell off in panic brieflyu but should prove far superior to cash when TSHTF.

  3. Mike Mac says:

    I just read in Barron’s that they are in agreement with you regarding staying positive on IBM

  4. Garrett says:

    Great article, Paul.

  5. A very interesting article, and it seems hard to take issue with any of it. It all makes sense and is very well laid out. Perhaps, rather than staying all out in the game, one could buy a nice house in an area having little to do with the ZIRP world and just listen to the water flow and the birds sing. Actually, I have that in Colombia’s coffee-growing region. I am still in the market trying to recuperate recent stupidly incurred losses, but at times I feel I want out of it, losses or not.

    I really appreciate your insights, Dr. Price.

  6. Succinct. Scarey. True.

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