Indicator of the Week: Should a Catchy Rhyme Rule Your Portfolio?

History indicates "Sell in May" might not be the best strategy

by Rocky White

Published on Apr 29, 2015 at 6:55 AM
Updated on Apr 29, 2015 at 6:55 AM

"Sell in May and Go Away" is a popular axiom you'll hear around this time every year. It basically tells investors to sell your stocks by May and come back in six months. The reason for this is to avoid the six months of the year that have historically underperformed and been more volatile. The table below breaks down years into two six-month intervals, November through April and May through October. You can see the S&P 500 Index (SPX) has performed much better from November through April, averaging a gain of 7.23% and positive 80% of the time. May through October shows an average gain of just 1.87% and positive 68% of the time. I don't think the data here justifies selling, as you'd still be missing out on some gains -- but remember, it's just a saying.  

SPX Last 40 Years

Popular sayings like this gain some notoriety after the observation is made. Oftentimes, the specific phenomenon goes away, but the saying sticks around (we love a catchy phrase). So I looked back over a shorter time frame, 10 years, to see if "Sell in May" was still relevant. Interestingly, even in more recent times, we still see a lot of outperformance from November through April compared to May through October.

SPX Last 10 Years
                     

Sell in August: Next, I decided to break down that May-through-October period into two pieces. I compared the returns from May through July to those from August through October. Looking at the average return in the table below, I think we've been selling too early. Over the past 40 years, the three months from May through July have seen the SPX rise by an average of 1.81%. However, when you look at just the last 10 years, the conclusion changes. Over the past 10 years, the August-through-October returns are better than May through July.
                      
SPX 6-Month Performance, 10 Years v 40 Years
                        
Investors Intelligence Poll: According to the weekly Investors Intelligence sentiment survey, there is a significant amount of optimism in the market. The percentage of bullish investors in that survey was 52.5%, and percentage of bears was 15.2%. That's a difference of just over 37 percentage points. That does not bode well for the next six months. I pointed out above that we are entering a historically bearish part of the year. That tendency is exacerbated when this poll shows these levels of optimism. In fact, the next six months average a loss of 0.30% when the bull/bear difference is 20 percentage points or more. Hopefully we break that trend this year.  

SPX May - October Last 40 Years


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