Sell in May and go away?

It seems that critics were wrong again for the 2nd consecutive year that this "Sell in May and go away" rule won't materialise (additional proof why you shouldn't pay much attention to those experts/analysts you read or see in the news, they don't know any better than you). The mayhem started in late May this year, after a strong run up. What is happening exactly? I only know this (after I got back from overseas on 30th May), Ben Bernanke hinted that QE3 may start slowly tapering off. This means less money to buy bonds and shore up equity prices, and interest rates will rise. What is the effect on the different asset classes? I'll give my 2 cents on the effect on equities and bonds.

As mentioned in my previous post "Alternatives to bank deposits", I mentioned rising interest rates are what I will watch out for, due to the high danger of the bond bubble bursting. Hence, I divested all my high yield bond unit trusts. What about the lower yielding ones like the 2 relatively safe short term bonds recommended previously? Below is the chart showing their performance:

Well, fluctuation is not much. Nevertheless, I still sold a portion of both bonds to lock in some gains. Note that since these bonds are short-term, hence their prices are less susceptible to interest rate changes.

Moving on to equity, what is happening now presents buying opportunities. For those in the know, P/E ratio for US equity indicates that the prices are still cheap despite the recent run up. This is due to the strong corporate earnings. Corporate earnings are what ultimately drive up stock prices. Hence, I hope the equity market will experience a much greater drawdown, so that I can finally increase my equity allocation substantially.

For those who still subscribe to "Market Timing" strategy,  you would have sold off in late April or early May. (Which is what I mentioned in this post). Did you?

For those who subscribe "Security Selection", the stock you hold should be able to withstand the recent selldown. If it did not, your belief should be that is will rise back in value. The last thing you want to do for the above 2 strategies would be to "buy high, sell low".

Till now, I haven't mentioned in detail what mix of strategies I am adopting. Will do so in my next post, and also shed some light on how my "Perfect Portfolio" has performed.