by Daniel Putnam | April 25, 2014 5:41 am
By now, most investors are well-versed in the mantra “Sell in May and go away.” This old saw — concerning the idea that better returns can be achieved by only owning stocks in the period from October through April — is based on average performance results that are skewed lower by a few years in which the May-September period brought substantial downturns.
But in any given year, actual market performance varies so widely that the “Sell in May” concept doesn’t provide much of an advantage.
The problem is, the approach sometimes works extremely well — obscuring that on a year-to-year basis, the approach essentially has been a crapshoot.
This paradox can be seen simply by looking at the recent past. During the three years from 2010 through 2012, the markets followed the script almost to the letter — meaning that investors who followed the “sell in May” strategy would have saved themselves quite a bit of short-term pain.
In 2012, the S&P 500 Index rose 11.4% through the first four months of the year before hitting a peak exactly on May 1 and finishing the month with a 6% loss. Stocks eventually regained their steam and moved out to new highs through the summer, meaning that “sell in May” would have worked — but only for a limited period of time.
The events of 2011 were similar at first, but no rebound was in the offing. The market did exactly what it was supposed to, peaking on April 30 before falling 1% in May. In this case, however, the April 30 high proved to be the peak for the year as the noise surrouinding the debt ceiling crisis caused the market to tank in the late summer.
Incredibly, the same story played out around the beginning of May 2010. After rising from February through April, the S&P peaked on April 23, rallied somewhat to a lesser high on May 3 (the first trading day in May that year), then dropped nearly 8% by the time the month was finished. The market remained under pressure through the summer because of the trouble in Europe, and it didn’t retake its April high until early December.
And that’s not all: The S&P 500 also hit intermediate-term highs within a few days of May 1 in 2008, 2006 and 2004.
This indicates that while a selloff doesn’t always occur in the first week of May, traders should be alert that when it does, it can be a sign of further weakness to come.
Knowing the events of the years discussed above, it would appear that the “sell in May” approach is almost a sure thing.
Unfortunately, nothing works quite so cleanly in real life.
The trouble with bailing on stocks at the end of April is that an investor also would have missed out on some substantial rallies. The accompanying table shows the years where stocks rallied in May, and in many cases went on to deliver outstanding gains through the rest of the year.
The table helps demonstrate that the real story is not necessarily direction, but volatility.
Since 2000, May has brought an average move of 3.1% in either direction. This is a boon for alert traders, especially in the sense that the first few days of the month generally provide a clue of what the rest of the month will bring.
For the rest of us, however, the unreliability of the “sell in May” strategy only underscores the importance of taking a long-term approach, rather than trying to make guesses about seasonal trends.
With such a wide variance of potential outcomes just in the past 14 years, there’s little to be gained by reading too much into historical averages.
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