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Sell In May – Yay Or Nay?

Tim Parker

According to Business Insider, based on analyses of average market performance by month over the past 50 years, stocks underperform in the six-month period from May through October when compared with the period from November through April.

Chartered Market Technician (CMT) and Founder and President of Eagle Bay Capital, J.C. Parets says, the "Sell in May" aphorism is a good one and well worth heeding. He points out that The Hirsch family publishes the Stock Trader's Almanac and touts what it calls "The Best Six Months" strategy. The almanac makes a compelling argument. Over the last 60 years, the Dow Jones Industrial Average has made all of its gains between Nov. 1 and April 30. According to the almanac, a $10,000 investment in 1950 compounded to $527,388 for November through April compared with a $474 loss for May to October.

The Hirsch statistics only went through 2009, but Parets notes the trend continued through October 2011. In the six-month span from November 2009 through April 2010, The Dow was up 1,295 points, or 13.3%. From May 2010 through October 2011, the Dow was up just 109 points, a little less than 1%. By this reckoning, the case is made for "Sell in May – Go Away."

Naysayers, however, point out that what seems simple rarely is. It is when those neatly packaged statistics are broken down, that problems begin to appear. Business Insider, for example, notes that in the six-month period beginning in May, the month of May, while weak, has been positive nonetheless. June has been negative on average, but July and August have been strong. September has been a real disaster. All other months, with the exception of February, have been strongly positive. This breakdown would require investors to sell at the end of May, jump back in for July and August, sell again in September and rejoin the game in October. This leaves February to contend with, which would seem to be a good time to drop out again for 28 days.

This is impractical for a number of reasons. First, if the financial whiplash doesn't kill you, the tax and transaction costs will. Second, statistics are averages. What about those years when July and August are up? Also, consider the fact that average losses in June and September are only about -0.2% and -0.5%, respectively. Not exactly heart stopping numbers.

Finally, there is the issue of knowing precisely when to get back in after a market drop. Over the long haul, stocks do well. The stop and start of seasonal timing, the "nay" side says, is just too complicated and too risky. Plus, let's not forget that while many will try, timing the market is a statistically impossible task over any long, revenue-producing time frame.

More from the Nay Side
Scott Rothbort of The Wall Street Journal presents a number of alternative seasonal timing scenarios, all based in part on the "Sell in May – Go Away" adage. He starts with the conventional wisdom that since October is the month of "crashes," selling in May and reentering at the end of October might make sense. Except that on average, the S&P 500 has gained 0.74% in October. If an investor were to liquidate in May and re-enter at the end of September (to take advantage of the 0.74% bump in October) they would forgo the 0.55% average gains realized over the summer months.

Another scenario involves selling in August and coming back in October, thereby avoiding the normal average declines in the dog days and early fall. This, of course, brings investors back to the problem of taxes and fees for what amounts to a two-month vacation from investing.

Finally, Rothbort postulated the notion that gains in the stock market are front-loaded in the first four months of the year. He tested this hypothesis by looking at returns for the S&P 500 for the first four months of every year going back to 1950. He eliminated years in which the index gained less than 8.71% in that four-month period, leaving 16 years in which the S&P 500 gained more than 8.71%. Out of those years, on average, the S&P 500 gained an average of 6.93% – certainly not a return any investor would have liked to miss.

Take Action
At the end of the day, seasonal timing adages, such as "Sell in May – Go Away," seem to respond better to the collection of statistics than to real world investing. Getting in and staying in, both from a statistical viewpoint and from a practical viewpoint seems to be a better play. Are there risks? Of course there are. It's the stock market and, by its nature, the market is filled with risks. On the whole, however, "Sell in May – Go Away" doesn't seem to be any more of a revenue-producing strategy than the many other stock market wives' tales.

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