Sell in May and Go Away!?

After enjoying a somewhat quiet and profitable 1st quarter, one has to wonder if the other shoe is about to fall.  That brings us to the theory of “Sell in May and Go Away” which states that investors should sell their stock holdings at some point in (or near) May and then wait until late fall to buy back in.  The other side to the coin is that you buy in November and hold until April.  Support for the theory may be that investors load up on stocks late in the year due to bonuses, etc. and then forget about them, especially during the summer months.  Then, when traders return to work from their summer vacations they dump the stocks they aren’t happy with and reinvest the proceeds later in the fall. 

 

Does the theory hold water?  What about this year? 

 

I have seen studies using data from as far back as 1896 that seem to support the theory.  The data seems to indicate a pattern of returns on the DJIA that basically flat-line from May through early fall before moving higher later in the year.  More recent data seems to support this notion as well.  The markets reached a mid-year peak in April the past two years and then experiencing little or no growth (and, I might say, quite a bit of volatility) during the summer before rallying towards year end.  Actual results show that the S&P 500 fell 17% from May through July in 2010 and 19% from April to October 2011.  Both selloffs, however, occurred at times when monetary stimulus programs were expiring.  On the other hand, 2007 and 2008 had better market returns during the summer months than the rest of the year.    

 

A study by Jeffrey Hirsch, publisher of the Stock Trader’s Almanac, says that if you had invested $10,000 into the market on November 1, 1972, sold all of your holdings each year on April 30th and bought back in on November 1st, you would have over $160,000 today.  If you had invested in a similar fashion but bought on May 1st each year and sold on October 31st, you would have only about $7,500.  Of course, it is a risky operation to follow this or any other anomaly when investing and sticking to a flexible asset allocation approach based on your objectives, risk tolerances, tax situation, and the is usually a more reliable way to invest.

 

This year, we have to deal with another stimulus package that will wind down (Operation Twist), an election year, and earnings challenges and these will all impact portfolios.  The stimulus issue may be a net negative, the election year is usually a net positive, and so we are left with earnings.  The 1st quarter was strong and analysts expected the 2nd quarter to be somewhat weak, which could have harbored strong feelings towards selling in April or May.  The good news is that 2nd quarter earnings have been better than expected (witness Apple’s huge results reported this week).  So, we may have a better summer than expected!

 

Hope you are having a nice spring and are looking forward to a great summer.  Hopefully, the warm weather we experienced here in the Madison area in March will return soon!

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