“Sell in May and go away” — There’s nary a trader alive who hasn’t heard this old phrase. And that’s because, for a simple rhyme, it has a world of truth to it. Since 1950, the S&P 500 has performed significantly better from Nov. 1 to April 30 than it did from May 1 to Oct. 31.
Of course, like all sayings that have survived so long, exceptions have been made. For instance, in 2007, the markets saw a reversal of the trend, with the summer months gaining more than 4% and the winter/fall months declining almost 10%.
So, should you jump ship because of a time-honored general rule, or thumb your nose at the silly adage? We asked some of our writers to discuss whether investors should sell this May and go away, or stick around for the summer — and why. Here’s what they had to say:
“Sell in May and Go Away” has been one of the most persistent long-term trends in the stock market. The April 16 issue of Barron’s reported that $100 invested in the S&P 500 since 1945 would have grown to $9,329 if it had been invested only in the October-April period, but only $99 if it were invested between May and September.
These results should come as a surprise to nobody — the concept of selling in May has become so pervasive that there are few investors left who haven’t heard about it. And that’s exactly the trouble.
Recall that about 10 years ago, the January Effect was the calendar trend that couldn’t miss. We were told that stocks in general — and small caps in particular — had produced outstanding returns in January over time. This concept caught on in the financial media, and before long it was as popular then as “Sell in May” is now.
And guess what: Stocks actually underperformed in January in the period from 2001-2010, while small caps lagged large caps in every year from 2008 through 2011. Part of this was investors’ attempt to front-run the move, spreading the effect out over the fourth quarter. The full analysis of the January Effect’s disappearance is available here.
Based on the coverage the “Sell in May” mantra has received in recent weeks, we might be near a similar tipping point with this trend. Look for “Sell in May and Go Away” to go the way of January Effect in the years ahead.
As a writer who covers the markets, I’m a big opponent of clichés. Indeed, one of the most abused clichés plaguing the investing lexicon is the adage “Sell in May and go away.”
However, as an investor who’s actually in the market, clichés often are replete with profitable wisdom. The “Sell in May” mantra is one piece of advice with statistics to back it up. According to the Stock Traders Almanac, if you went long the market on Nov. 1, 1972, and spent 37 years selling all of your holdings on April 30, then re-buying on Nov. 1 and doing it all over again, you would have earned an average annual return of 7.4%. If you would have done the reverse — buy in May and sell in November — your return would be a paltry 0.4% over the same 37 years.
Now, I am loath to manage my holdings based on homespun wisdom, as I think it fails to take into account all of the factors influencing markets at any given time. However, I also am mindful of another cliché that rarely steers investors wrong, and that is “Don’t fight the tape.” If stocks begin to trend lower because of the “Sell in May and go away” effect, I’m not about to argue the facts.
“Sell in May and Go Away” has a decent track record, but like all market patterns, it’s far from perfect.
True, it would have saved investors from steep losses in 2011. The market shed nearly 19% from May to August, hurt by fears of a double-dip recession, the European debt crisis and the earthquake and tsunami in Japan. The prior year was ugly, too, as the tepid recovery sliced more than 10% off the S&P 500 between May and August.
On the other hand, in 2009 the bull market took off. After stumbling in late spring, the market was up about 15% from May to late August — and tacked on an amazing 40% by April 2010. Investors who sold in May and stayed away that year missed out on powerful gains.
So far it looks like 2012 will offer a reprise of the last two years, however. The global economic picture of a recession in Europe and slower growth in China, peak corporate profit margins and the fact that stocks logged their best first quarter since 1998 look like they’re conspiring to produce a summer of sideways trading at best.
But that’s not to say you should pull all your bets off the table. The more you trade, the more likely you are to be wrong — while racking up fees in the process. Asset allocation and investment horizons longer than the next three to six months have a higher probability of helping your portfolio than trying to time the May market.
Seasonal influences on risk assets are no myth. While the tendency for a summer slump in stocks also has some truth to it, in my humble opinion, the more important factor to look for is an increase in volatility.
Click to Enlarge The No. 1 factor in my analysis is always the current market environment/structure, and that also holds true for the summer months. In the weekly chart of the S&P 500, I highlighted the summer months (May-August) for each of the past 10 years. While certain summer periods such as 2008 and 2011 certainly had an ugly tone to them, there were multiple summer periods with flat-to-positive performance. In 2009, for example, the U.S. government started massive stimulus programs to raise asset prices, which was the overriding structural factor to focus on and led to a big summer rally.
As we head into May this year, we again must understand the current environment. While it’s too early to make a prediction, I will point out that equities have rallied nicely this year, and further stimulus in the form of quantitative easing or the like might not be on the table unless equities see lower prices again. On the other hand, with a presidential election around the corner, we can be sure that everything will be done to keep the house in order until the end of November.
During the summer months, trading desks are less staffed than during the spring and fall, which can lead to a drop in volume — especially toward the end of the summer. Therefore, when I speak about a tendency for increased volatility in the summer months, I don’t so much mean spikes in the VIX as I mean an increase in the frequency of irrational market moves that might be difficult to forecast using traditional technical analysis.
“Sell in May and go away” is an old Wall Street saw that has statistical validity. The clustering of positive returns for the S&P 500 Index is decidedly in the November-April period, when looking at average monthly returns since 1950.
As usual, there can be notable exceptions. Last year it worked nearly perfectly, with the S&P 500 falling 7.8% in the May-October period. In 2010, the summer lull produced a 5.01% return (about a third of what the market did in the following November-April period), although in 2009, the May-October period was amazingly profitable
as the market came off a generational low in March of that year.
In 2012, we have good odds to repeat statistical historical return patterns. The European situation has deteriorated notably in the past month following what looked to be temporary stabilization brought on by the deployment of 1% LTRO funds from the ECB in the problematic PIIGS sovereign debt markets.
Spanish credit default swaps just traded to a record 512 basis points this week, while the Spanish benchmark IBEX index is at 7,125 at last count, or just 6% above the generational March 2009 low. Given the 24% unemployment in the country and
bad loans spiking 110% on a YOY basis to 8.2% of total in February — the highest level since 1994 from less than 1% of the total in 2007 — one can see how further deterioration in Spain can be a potent catalyst for a repeat of last summer’s European drama.
Ivan Martchev is a research consultant with institutional money manager Navellier & Associates. The opinions expressed are his own. Investors should consult their financial adviser prior to making any investment decisions.