Improving on ‘Sell in May and Go Away’

Combine it with 'The Trend Is Your Friend,' and see the difference

   

One of the best-known market “strategies” is the approach that follows the catchy saying of “Sell in May and Go Away.” Perhaps due to its simplicity, the rule has traction among investors as one of the Golden Rules to follow, and you’ll hear a lot of opinions on the matter, given the attention that the “rule” has garnered and the volatility that the market has endured over the last few years. For this reason, we’ve compiled some results and a brief explanation.

Johnson May 1 Improving on 'Sell in May and Go Away'The first table on the right displays the average returns for the two periods in question (May to October and November to  April) for each year since 1990. Clearly, the bottom-line averages support the notion that selling in May has some credibility as a strategy that may help beat market returns. But here’s a simple way to improve this strategy.

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Most investors have also likely heard of another comparatively simple rule: “The Trend is Your Friend.” This is the notion that you should hold stocks when the market’s averages are trending higher. By combining these two simple rules, the results of “Sell in May” improve dramatically.

For the purpose of this study, we determined whether the trend was the market’s friend based on whether or not the S&P 500 was trading above its 20-month moving average. This same evaluation is often used as the measure of whether the market is in a bull market or not (SPX above its 20-month = bull market). If the SPX was above this trendline, then we stayed in the market across the May through October period, and if below the trendline, we sold in May. In fairness, we extended the same rule to the November through April period as well to determine the effect of the “Trend” rule on both periods.

Johnson May 2 Improving on 'Sell in May and Go Away'Bottom line, as the second table shows, combining the two rules increased the May through October returns from 0.9% to 3.9%, a marked improvement and certainly a move in the market that’s worth participating in. Not surprisingly, the November through April period’s returns also improved, from 6.8% to 8.4% when the “Trend Rule” was overlaid.

With the S&P 500 currently trading well above its 20-month moving average, the historical results of the “Sell in May” and ”Trend is Your Friend” combination suggest that investors’ expectations about this age-old rule could be dashed this year.


Article printed from InvestorPlace Media, http://investorplace.com/2012/05/improving-on-sell-in-may-and-go-away/.

©2014 InvestorPlace Media, LLC

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