Many articles have been posted today, May 1st, regarding the investing adage “sell in May and go away”. Below are links to 10 such articles on the subject to help you decide what course of action you should take.
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As the S&P 500 is trading just shy of its all-time nominal high, there are still many headwinds facing the U.S. equity market that have the potential to derail the rally. The three risks to the market discussed in this article provide reasoning as to the problems that the rally faces and why it may be a good idea to “sell in May and go away”.
At this time of year countless media outlets can’t help but regurgitate the investing adage “sell in May and go away” and recent history promises to make this year’s warnings all the more urgent but please don’t use the most recent market experiences to make sweeping conclusions about the future. While the last three years make it seem like a “sell in May” strategy would be a no-brainer,
the long-term data paints an entirely different picture.
The seasonal effect is very real and has been written about extensively in popular media (and to a lesser extent in academia), but relatively little has been written examining what may be the etiological factors behind this phenomenon. So this article attempts to briefly address the question: what are the causes of this phenomenon?
Historically, since 1950, the Dow Jones Industrial Average only gained an average of 0.3% from May through October. The Dow gained an average of 7.5% from November through April since 1950. There is no doubt that a dip in the market is due. I wanted to explore the possible causes that could trigger this scenario for 2013.
The inner trader in me is constantly worried and constantly thinking I should be trading Mr. Market’s schizophrenic mood swings. The “sell in May and go away” thesis has shown itself quite rigorous and valid over 50+ years, so it is hard to ignore but you really must analyze it further than 6 months risk-on (November through April), 6 months risk-off (May through October) like the stock traders’ almanac implies. Instead, you should break it down month by month to get a more detailed picture of how you should be trading, if you are a market timer.
While investors debate the merits of “Sell in May and go away,” we thought it was worth pointing out that May has increasingly become a volatile month in recent years. As shown in the table below, two of the 10 worst months of May going all the way back to 1928 have both occurred during the current bull market (2010 and 2012).
I feel there is no advantage in “selling in May and going away,” since you have an opportunity to score market-beating profits by focusing on stocks that surprise Wall Street with rising earnings. In addition, this bull market seems to have some strong “legs” to support it, namely the powerful impact of stock buybacks.
Several media outlets recently focused on the “sell in May and go away” strategy for North American equity markets. The strategy assumes that they usually move lower from the end of April to the end of October – so investors should best avoid equity markets during this period. However, a closer examination of equity market history shows that the expression is based on myth.
Does the theory hold water? First, here’s how the “sell in May” idea is supposed to work.
There is a belief among many investors that excess returns can be earned in the market by owning stocks for only 6 months out of the year and sitting the rest of the time in interest-bearing Treasury securities. This market-timing strategy is commonly known as Sell in May and Go Away because the exit period is May. CXO Advisory took a look at “Sell in May” over the long-term to determine if this belief was fact or fiction.