Breakout

Sell in May and Go Away: Will It Work Again?

Jeff Macke
Breakout

"Sell in May and go away." It's a well-worn trading chestnut that drives fancy fundamental analysts nuts. It's such a cliche'. But, at least for the last two years, it's been so right. In both 2010 and 2011 stocks started strong and lost steam towards the second-half. Selling the Spring rallies in both cases allowed traders to buy stocks back at radically lower levels later in the year.

With the Dow Jones Industrial Average still holding stubbornly near 52-week highs and up over 8% so far in 2012 Breakout welcomes Jeff Hirsch, the editor-in-chief of the Stock Trader's Almanac; widely regarded as the go-to source for historical market data and wisdom.

"It doesn't work every year," says Hirsch of the Sell in May rule of thumb, "but it's been seasonally proven, historically proven."

Don't pick up your phone to dump everything just yet. "It's doesn't say 'sell May first,'" clarifies Hirsch. "It says 'sell in May.'"

Obviously there's a bit of a waffle going on, especially when an event like the 2010 Flash Crash occurs. Hirsch says the axiom allowed investors to avoid the market plunge.

As for when you'd buy back into the market, Hirsch says "buy in October, get yourself sober." So noted.

Hirsch's historical proof for the virtues of avoiding the "Worst six months" for both the Dow and the S&P500 date back to 1962. Since that year, a strategy of selling in May then buying back stocks in October would have grown $10,000 invested in 1962 to some $620,000 by today.

Doing the reverse, that is to say buying every April and selling at the end of the following October would have had a slightly negative annual return.

There are other nuances to the strategy according to the Presidential election cycle. An incumbent President up for re-election is typically bullish, but election years in general see a pause or pullback once the two candidates are determined.

Add it up and the book as Hirsch sees it is suggesting this: "Tighten up stops, limit new buying, take defensive positions and look for a 5, 10 or maybe 15% correction between now and the election."

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