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It’s that time of the year again…
May.
The old market saying is “sell in May and go away”.
The saying originates from London’s financial district when
aristocrats, bankers, and merchants would sell all their stocks in
May, escape the city heat for the summer, then return just in time
for the annual St. Leger’s Day Stakes horse race in September.
For some reason, the saying caught on and now it's part of the
market's DNA around the world.
In Australian small cap stocks, the saying has morphed to the
expectation that June will be full of tax loss selling where
investors look to crystalise paper losses to offset any tax payable
on gains.
Instead of suffering through expected depressed share prices in
June, the saying “sell in May and go away” has been adapted for
those that try and get ahead of the June tax loss selling
phenomenon.
“Sell in May” and “June tax loss selling” are generally more
prevalent during bull markets like 2020 and 2021, where people
are sitting on capital gains (remember those?) that they need to
offset by selling some of their losers.
We doubt many people are enjoying many capital gains right now
after the shocking last 12 months we have seen on the markets.
Also, having closely watched the small cap market (as we always
do) it feels like most people who had an itchy trigger finger on the
sell button have already exited sometime over the last 6 months
while the market was in a slump.
Either way, our observation over the years has been that the
investments we make during the market downturn are the ones
that generally show the best returns over the long term.
So as counter-intuitive as it feels to transfer cash for placements
into beaten up stocks while in the depths of a bear market
May/June selling season - this is exactly what we have been
doing.
This week we have participated in the TMR cap raise, the IVZ SPP
and the DXB rights issue.
And we will be participating in most cap raises in our portfolio
stocks as and if they come up in the next few months because we
are long term investors.
As long term investors we believe that weak points in the market
are a good time to top up and average down on our Initial Entry
Price - because the market always (eventually) comes back.
This is not personal financial advice, but how we are treating the
current market conditions which works for our circumstances.
We will report back in a few months on how each of the capital
raisings we participated in during May/June play out…
If the market rips upwards in July like it did last year we will feel
like geniuses, or there might be many more months of pain and
face-palming as companies pass the hat around again at possibly
even lower prices - nobody knows.
But why exactly do markets expect June to be rough?
June is the notorious “tax loss selling” month.
June marks the last month before the end of the Australian
“financial year” - meaning it gives investors 30 days to start
thinking about what their tax returns are going to look like come
the 30th of June.
For investors who were lucky enough to have a few wins over the
course of the financial year (hello LRS, ONE and ALA), it means
they could be staring down the barrel of a “capital gains tax bill”.
Almost always those same investors also have a few investments
that didn’t go so well and are sitting on paper losses - paper losses
are on-screen losses that haven't yet been crystalised by selling
the position.
Some investors may look to “offset” that capital gains tax bill and
start selling those losses, booking them and then using the tax
rule that allows losses to offset gains made in the financial year.
Like clockwork, this happens every year...
Investors wait until the last few weeks of the financial year, hoping
that one of the companies delivers a material piece of news, but
finally give in and book the losses as the company’s share price
continues going lower.
Usually the more investors that sell, the lower the price goes and
this spooks more investors into selling too, creating the infamous
June tax loss selling spiral.
This year may look a little different with the markets generally
being pretty rough for many months already.
Investors will likely have more losses than gains and may not have
anything to offset them against.
This might mean less than usual selling as we approach the end of
June.
It also means the late June bargain hunters who usually appear
might even start buying earlier as currently depressed prices don’t
fall as far as expected.
The good (and annoying) thing about small cap markets is that
you can never predict what will happen, especially not based on
past performance.
Knowing how the small cap market gods behave when we try to
find any patterns or repeatable events in the markets can be a
challenge.
June might even end up being a positive month if too many
investors decide to try and start picking up June bargains early
and end up front running each other into a little rally.
We are long term holders and don’t try to get clever by ducking in
and out of positions over the short term - our plan is to just take
the placements, rights issues and SPPs as they come during the
rough patches, hold and wait for the bounceback.
What about July?
Last year the market shot up in the first couple of weeks of July
after most beaten up small caps were oversold, and bargain
hunters swooped in.
Sometimes this can even happen in the last few days of June as
investors and traders try to pick the June bottom.
A bounce back is usually seen on the most beaten up small caps
that suffered most in May and June.
Ironically, in July sometimes it can be the winners that cop a bit of
selling, instead of the losers.
Investors sitting on big paper gains (currently a rare beast) and
want to take some off the table to lock in some profits might
decide to hold through May and June in order to lock in those
gains early in the new financial year.
By waiting to sell in the first few weeks of July (which is the start
of the new financial year), the investors have all of that capital
available to re-invest in other opportunities without having to worry
about the tax bill of the sale for at least another ~11-12 months.
Maybe they will cycle that capital into some of the beaten up
stocks that copped it in June?
The problem with these predictions is that small cap stocks have
thousands of individual investors, each with different
circumstances, different paper losses and gains and a different
selling strategy - which makes it impossible to accurately predict
what might happen.
In summary, here is what we expect to see based on some
assumptions around the general circumstances of thousands of
small cap investors in the current market conditions:
1. In May - sellers outweigh buyers in anticipation of what MIGHT
be coming in June.
2. In June - more sellers in the companies where share prices are
trading near 12-month lows as investors look to book in tax losses,
BUT not as much as the market expects, leading to an earlier than
expected bounce back in the last few weeks of June

Copied form an email received today from "next investors". Let's see how she blows. Hopefully drug into arms late June (this is a guess). Hopefully a couple more testing sites giving approval.