Sell in May and go away

The old saying ‘Sell in May and Go Away’ is starting to be whispered around the market. There are many reasons behind this seasonal period for the ASX, including the following:

• Northern hemisphere investors rule off their book for their summer holiday period
• Investors look to start the new financial year with a ‘cleaner’ portfolio
• Investors sell underperforming positions at losses to offset taxable income
• Investors sell outperforming positions to lock in financial year profits

The impact of the above can have a particularly pronounced effect on small cap stocks which, by their very nature, have much lower levels of liquidity. In simple terms, share prices can fall dramatically on low volumes when ultimately the business fundamentals haven’t changed.

NAOS typically see this period as a good window of opportunity to employ a contrarian investment mindset or buying when there is ‘blood in the streets’. When looking at your small cap portfolio during this time it is useful to consider the following;

• If you do plan on executing some profit taking or tax loss selling, don’t leave it too late
• Understand that others in the market might be selling for reasons not related to the company fundamentals, which can be a great opportunity to add to existing positions.
• Keep on top of your ‘like to buy’ stock watch list during May & June, good buying opportunities may present themselves
• Take a medium to long-term view, not a one month view.

This article was contributed by NAOS Asset Management:  (VIEW LINK)