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Sell in May (But Don’t Go Away)

Posted By Barry Ritholtz On May 6, 2004 @ 4:52 pm In Finance | Comments Disabled

I keep hearing people talk about “seasonal factors,” as if that is the only element influencing markets. In reality, seasonal factors can be influential, but are often trumped by other, more immediate, issues. Since 1950, the vast majority of market gains took place in the 6-month period from November through April, according to data compiled by Stock Trader’s Almanac [1]. The rest of the calendar year was essentially flat.

Other Factors are in Play This Year: Ideally, selling in May takes place after the November to April rally. We didn’t exactly have that this year, as the markets put in a short term peak January 26, an have been range bound since. The sell off may climax, rather than begin, sometime after the May 1st start date.

Several other reasons suggest selling in May (and staying out of equities for 6 months) may not be the ideal course of action in 2004:

1) Fed Rate Increases: Historical studies show that it is advantageous entry point to buy once the Fed raises rates for the first time. Going back to 1950, the market is up most of the time 12-months after the first rate hike. Financials, Consumer Staples and Health Care all tend to do particularly well. Even the hikes in 1999 saw the markets higher a year later (1973 and 1987 were the exceptions).

2) The first 5% Pullback. It is unlikely a 10-month SPX rally would end at the first pullback. Consider history: That first 5% SPX or Dow drop takes place, on average, at the 60% mark. This suggests more upside remains. Considering the magnitude of the gains the market has enjoyed since March 2003 – October 2002 for the Nasdaq – a period of consolidation and digestion is not terribly unexpected.

3) Presidential elections 4 year cycle: This cycle sees markets bottom in the 2nd year and peak in the 4th. That held true as the markets made their lows in October 2002. The 4-year cycle has already proven true in 2004 (the market peaked January 26).

The big question is, will the market see additional highs later this year? I suspect so. There is plenty of stimulus still in the system, and Money Supply continues to expand rapidly.

The final verdict: In my opinion, there’s more upside, but the ideal entry will come from somewhat lower levels as we head towards the next Fed meeting.


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[1] Stock Trader’s Almanac: http://www.stocktradersalmanac.com/

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