Truth Behind "Sell in May and Go Away"

It's that time of year again. If you haven't heard it by now then here you go. As the saying originally went,

"Sell in May and go away. Stay away till St. Leger’s Day”

The inference is that there is no point trading in the summer. All the brokers and fund managers will be out in the Hamptons working on their tans. The saying suggests that the big boys won’t get back to business until Horse Racing season in England is over in the Fall. The British have been celebrating this day in September since the St. Leger Stakes, last leg of the English Triple Crown, was established in 1776. We Americans like to call this time of year, “Football Season”. But I digress.

OK, so sell in May. Got it. But what are we really talking about here? Do we literally sell everything we own just because it’s Monday May 2nd? The Hirsch family says so, they’ve been publishing the Stock Trader’s Almanac for what feels like forever. This year’s edition marks what I believe is the 44th year. A must read for anyone who manages money, their own or otherwise.

May marks the end of what the almanac calls, “The Best Six Months” strategy. Over the last 60 years, the Dow Jones Industrial average has made all of its gains between November 1st and April 30th. In fact, 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. These are amazing statistics. Hirsch only tallies up the totals through 2009, but the trend has continued. From November 2009 through April 2010 the Dow was up 1295 points, another 13.3% while being up just 109 points, less than 1%, from May through October of last year. The “Worst Six Months” have still been “the worst”.

[caption id="attachment_1134" align="aligncenter" width="557" caption="From 2011 Stock Trader's Almanac"][/caption]

In the most recent “Best Six Months” that ended on Friday the Dow Industrials went up another 1691 points, over 15%. So do we fight this seasonal trend? Or literally Sell everything, rent an RV and go catch baseball games at every ballpark in the country for the entire summer. We sit in cash, check out some ball games in random cities that we would probably never go to otherwise, and come back in the fall ready to rock!

It sounds like a blast, but I wouldn't be able to pull that off. So let’s dig a little deeper. First of all, The Best/Worst six months trade works this well for the Dow Jones Industrial Average – we’re talking just 30 stocks here. The almanac claims that the Nasdaq’s “Best Eight Months” lasts until the end of June so there’s some time left in Tech land. Also, no one said to “sell in May and go away” at the beginning of the month. The Almanac notes that in more recent years stocks have peaked in mid to late May.

Also, remember that there are exceptions to the rule. For example in 1958, the Dow was up over 19% in the “Worst Six Months” period, 10% in 1995, 18.9% in 2009 and many more cases where the market went up during the seasonally bearish period. Between 1965 and 1985 the S&P was down 15 of 20 Mays, but up 13 Mays in a row from ’85-’97, and split ever since. So things change. And as Sam Stovall recently told Harlan Levy,

"Of course, past performance is no guarantee of future results. But the old adage simply says that investors focus more on their tan than their portfolio, so don’t expect a very sharp movement higher this summer."

David Kotok of Cumberland Advisors adds that seasonally negative results are neutralized when the Fed is easing but suggests avoiding markets in the May-Nov period when the Fed is tightening. This year the Fed stops easing in June and goes to neutral; therefore, the outcome is not clear.

In addition to weak seasonal period for stocks there are a few more summer phenomenons to key an eye on this month. 30-Year Bond prices historically bottom out in May or June. Precious metals are typically weak early summer with Silver having a strong tendency to peak mid way through the month. Shoring Silver for the 6 week period ending June 24th has been pretty successful over the past 40 years.

There are some nice trades setting up both Long and Short this time of year. The most important thing is to manage risk. This is Rule #1 regardless of what the calendar says. We need to be aware of what typically happens in the summer so that we are prepared, but we're not making portfolio-altering decisions based solely on the fact that we're in May. This is Allstarcharts, and seasonal cycles are a part of the technical analysis that we do so I just wanted to clear up any misconceptions that some might have out there about May.

I'm off to go rent the biggest RV I can find. See you guys in September.

Also See:

Jeff Hirsch on Yahoo Finance's Breakout (Yahoo!)

Sell in May and Go Away (Business Insider)

Sell in May and Go Away? Yes (SeekingAlpha)