I think seasonality is often misused. Although economic cycles, political climates and public markets are constantly changing, the behavior patterns of humans remain the same. I spend a lot of time studying cognitive behavior and markets and it is very clear how foolish humans can be, including the robots they build. We behave in specific ways during some parts of the year and completely different in others. Those cycles play a role in annual cycles.
One of the most popular, and misunderstood, is the old “Sell in May and Go Away”. But what exactly does that mean? Should we blindly enter the month of May with a bearish selling strategy? Does that sound like a good idea? Historically stocks are up for the month of May about half the time and since 1950 the S&P and Dow average a 0% return. June has a similar history of 0% average returns and positive return close to half the time. But that’s not really what we’re interested in here, which is my point.
We care more about what this “Sell in May and Go Away” saying means for rest of the year and what it says about the current behavior of investors? Remember, the reason this phrase is popular is because May is the beginning of the “Worst 6 months” of the year. More importantly, it’s the end of the “Best 6 months”. The reason I refer to it as more important is because we take the information we get during the past 6 months to help us make decisions about the next 6 months. Were stocks up during the November – April period? Did they do what they were supposed to do – rally? Or were there larger selling forces at work? [Read more…]