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Sell In May? This Data Says Not So Fast

Wayne Duggan

Every year on May 1, the phrase “sell in May and go away” starts trending on Wall Street. With the S&P 500 up 17 percent year-to-date, traders are taking a close look at whether or not they should take the next six months off from the stock market.

What Is Sell In May?

The basis behind the “sell in May” trade is historical data. From 1950 to 2018, the six-month stretch between May and November has generated an average return of just 1.5 percent for the S&P 500, the worst six-month stretch of the entire year, according to LPL Financial. The S&P has traded higher during that six-month stretch just 63.8 percent of the time.

Sell in May traders see the risk-reward skew as unfavorable throughout this stretch given the relatively high probability of a downturn and the relatively low average historical return. However, experts are divided as to whether or not the sell in May trade is worth following in 2019.

Expert Take

LPL analyst Ryan Detrick said traders should be aware of the sell in May trade, but they shouldn’t take it too terribly seriously.

“Yes, ‘sell in May’ has a nice longer-term track record, but that doesn’t make it gospel,” Detrick wrote in a recent note.

Commonwealth Financial analyst Brad McMillan has said stock market adages like “sell in May” become popular because they are simple and tell a good story. However, McMillan recently wrote that these types of seasonal trends often get diminished or even disappear all together depending on the timeframe used in crunching the numbers.

In 2017, Bank of America looked at three-month periods dating all the way back to 1928 and found that June through August was the single best three-month stretch for stocks on average of the whole calendar year.

In addition, it’s generally better for long-term investors to avoid trying to time the market at all.

“No matter what data set you look at, over time, you do better overall by simply staying in, rather than trying to move in and out,” McMillan said.

January Effect?

Not only is the “sell in May” strategy inconsistent, DataTrek Research co-founder Nicholas Colas says history tells a different story about how stocks perform in May and June in years with abnormally strong January returns.

“The S&P ended up 13.1% in Q1, slightly higher than the average during the other eight years with abnormally strong Januaries back to 1958 (first full year of data),” Colas recently wrote. “So what happens next? History says more upside in May and June and the year’s peaks don’t come until Q3 or Q4.”

DataTrek found the S&P 500 averaged a 1.9 percent gain in the month of May and a 2.1 percent gain in the month of June in those eight years with strong January gains.

If the market follows the pattern of other years with hot January returns, the last thing investors should be doing in the month of May is selling S&P 500 funds like the SPDR S&P 500 ETF Trust (NYSE: SPY).

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