Sell in May and go away: fact or fallacy?

Where is the stock market heading? Has the rally that started in early March been exhausted? These are the key questions on all investors’ minds as financial markets remain caught between the frantic actions of central banks to get the cogs of the credit system and economy turning again on the one hand, and a still shaky economic and corporate outlook on the other.

It is therefore no wonder that even so-called “pop analysis”, including some legendary axioms, is resorted to in a quest for direction. And besides “buy low and sell high” few other axioms are more widely propagated than “sell in May and go away”. A Google search revealed an astounding 127,000 items featuring this phrase.

As equities have seen a particularly strong six-week rally, followed by what looks like the start of a consolidation/retracement of some of the recent gains, investors are justifiably questioning the market’s next move. And they nervously wonder whether this May will not only herald longer days in the Northern Hemisphere, but also live up to its reputation as the advent of a corrective phase in the markets.

The important issue, however, is whether this axiom actually has any scientific basis at all. Analyzing historical returns, the figures vary from market to market, but long-term statistics seem to show that the best time to be invested in equities is the six months from early November through to the end of April of the next year (“good” periods), while the “bad” periods normally occur over the six months from May to October.

A study of the MSCI World Index, a commonly used benchmark for global equity markets, reveals that since 1969 “good” periods returned +6.5% per annum while investors were actually in the red by -1.0% per annum during the “bad” periods.

“Sell in May and go away” also holds true for the US stock markets. An updated study by Plexus Asset Management of the S&P 500 Index shows that the returns of the “good” six-month periods from January 1950 to March 2009 were 7.9% per annum whereas those of the “bad” periods were 2.5% per annum.

A study of the pattern in monthly returns reveals that the “bad” periods of the S&P 500 Index are quite distinct, with five of the six months from May to October having lower average monthly returns than the six months of the good periods. Interestingly, May – the first month of the bad patch – is the only exception.


Historical average returns from May to October in emerging markets also tended to be weaker than those from November to April, as shown in the graph below (hat tip: US Global Funds).


But what exactly does this mean for the investor who contemplates timing the market by selling in May and reinvesting in November? Further analysis shows that had one kept the investment in the S&P 500 Index only during the “good” six-month periods, and reinvested the proceeds in the money market during the “bad” six-month periods, the total return would have been 10.5% per annum.

These calculations do not take tax into account. And, of course, every time one switches out of and back into the stock market there are costs involved, which would also reduce the returns for the market timer.

How did the good and bad periods stack up during the past two years? The results are as follows.

• May 2007 – October 2007: +4.52%
• November 2007 – April 2008: -9.62%
• May 2008 – October 2008: -30.1%
• November 2008 – April 2009: -5.1%

Some you win, some you don’t! It seems that the axiom “sell in May and go away” in itself is a rather doubtful basis for timing equity investments. However, it may serve a useful purpose as input, together with other factors, to otherwise rational decision making.

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Category: Technical Analysis, Think Tank

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

3 Responses to “Sell in May and go away: fact or fallacy?”

  1. Jojo says:

    Mark Hulbert has written on this a number of times:
    Welcoming winter
    Commentary: Halloween Indicator on Monday went on a buy signal
    By Mark Hulbert, MarketWatch
    Last update: 9:41 p.m. EST Nov. 3, 2008

    ANNANDALE, Va. (MarketWatch) –Whatever you otherwise think about the so-called Halloween Indicator, you have to admit that it worked like a charm over the past six months.

    For those of you unfamiliar with the Halloween Indicator, you might know it by its other name: “Sell in May and Go Away.” Regardless of what it’s called, it refers to the seasonal tendency of the stock market to perform better during the November-through-April period (the so-called winter months) than in the other six months of the year (the summer months). On average, in fact, the stock market has produced almost all of its gains during the winter months; the market on average is nearly flat during the summer months.

    Perhaps the best-known academic study of this indicator was conducted by Ben Jacobsen, a finance professor at New Zealand’s Massey University, and Sven Bouman of AEGON Asset Management, a Netherlands-based pension fund. Their study appeared in the December 2002 issue of the American Economic Review, a prestigious academic journal. Read study

    The researchers studied the returns of 37 countries’ stock markets between 1970 and 1998. They found statistically significant evidence of the Halloween Indicator’s existence in 36 of those countries.

    Those who followed this indicator this past year went to cash at the close of April 30, when the Dow Jones Industrial Average ($INDU) stood at 12,820. They re-entered at the close this past Friday, when the Dow stood at 9,325. In other words, followers were in the safety of cash during a six-month period in which the Dow dropped 27%.

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