Sell In May and Go Away?

Apr 30, 2014   //   by Profitly   //   Market, Profitly  //  Comments Off on Sell In May and Go Away?

It’s no secret that despite a little bit of a selloff as of late, many stocks are still near their all-time highs. It’s also no secret that it is almost May already. You might be able to see where I am going with this…have you ever heard of “sell in May and go away?” If not, you are sure to hear about it this year. The blog posts and financial commentators are out early with their thoughts on what you should do with your money.

First of all, let’s define this phenomenon in case some of you haven’t heard of it. According to Investopedia, Sell in May and Go Away is:

“A well-known trading adage that warns investors to sell their stock holdings in May to avoid a seasonal decline in equity markets. The “sell in May and go away” strategy is that an investor who sells his or her stock holdings in May and gets back into the equity market in November – thereby avoiding the typically volatile May-October period – would be much better off than an investor who stays in equities throughout the year.

This strategy is based on the historical underperformance of stocks in the six-month period commencing in May and ending in October, compared to the six-month period from November to April. According to the Stock Trader’s Almanac, since 1950, the Dow Jones Industrial Average has had an average return of only 0.3% during the May-October period, compared with an average gain of 7.5% during the November-April period.

There are limitations to implementing this strategy in practice, such as the added transaction costs and tax implications of the rotation in and out of equities. Another drawback is that market timing and seasonality strategies do not always work out, and the actual results may be very different from the theoretical ones.

While the exact reasons for this seasonal trading pattern are not known, lower trading volumes due to the summer vacation months and increased investment flows during the winter months are cited as contributory reasons for the discrepancy in performance during the May-October and November-April periods, respectively.”

And since Tim and the other gurus focus a lot on charts and patterns, I wanted to share this great post from another chart strategist, J.C. Parets of allstarcharts.com

In his post titled “Let’s Talk About ‘Sell in May and Go Away,'” Parets says the math behind this makes sense and we should listen to it. He looked back at the Dow Jones Industrial Average to 1950, and the statistics are “simply staggering” in his words. According to Parets, if you had invested $10,000 but only owned stocks between November 1st through April each year, on April 30th of 2013 that $10,000 would have been worth $775,055. But, if you had done the exact opposite and purchased the Dow Industrials every year on May 1 and sold on Halloween, you would have actually lost $687 over the past 63 years. Yes, you would have LOST money over 63 years!

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Check out the above graphic. If that doesn’t make you take this market legend seriously, I don’t know what will.

This wasn’t always the case, but it has been since about 1950. Parets shared a one-year seasonal pattern from the Stock Traders Almanac and encouraged his readers to look at the difference between the pre-1950 period and the behavioral patterns since then. Check it out below:

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So, in summarizing this charts, mid-term election years bring even worse numbers. And hey, we’re in a mid-term election year! He also points out that this is traditionally the worst year of the 4-year Presidential Cycle. The average return during this upcoming 6-month period on midterm years is -0.43%. And as Tim would say as well, stats don’t lie. Below is the Presidential Cycle Composite chart for the S&P500 going back to 1928:

4-22-14-Presidential-Cycle

Parets says that based on the Presidential Cycle and 6-month cycle, we are entering a period of time where the US Stock market has struggled historically. However, if history is any indication, this could bring one of the best buying opportunities we’ve had in years.

In an important disclosure, Parets notes that he has been bearish about US Stocks all year long.

FBN Securities J.C. O’Hara also ran some numbers, and they are in agreement with Parets’. He looked at the past 20 years and created a chart of the returns. He told Business Insider that “The majority of the time the market was unimpressive over those summer months,” and that “the majority of the markets returns were housed in the first model that was long the months into May and the months after September.” Check out his chart below:

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