Monday , 27 May 2024

Should You “Sell In May & Go Away?”

As the end of April approaches, will 2023 be another year where the “Sell In May” strategy works? While no one knows the answer, historical statistics, current economic indicators, and technical measures suggest some caution is warranted….

This is an edited and abridged version of the original article to provide you with a fast and easy read.

An old adage says investors should “Sell May And Go Away” and historical analysis prove this as $10,000 invested in the market from November to April vastly outperformed that amount invested from May through October.

Sell In May And Go Away Market Performance

…Not every summer works out poorly, however. Historically, there are many periods where “Sell In May” did not work and markets rose. 2020 and 2021 were examples where massive Federal Reserve interventions pushed prices higher in April and subsequent summer months. However, 2022 was the opposite as April declined sharply as the Fed began an aggressive interest rate hiking campaign the preceding month.

Performance of the months of April

As the end of April approaches, will 2023 be another year where the “Sell In May” strategy works? While no one knows the answer, historical statistics, current economic indicators, and technical measures suggest some caution is warranted….

Indicators Suggest Caution

In the latest Bull Bear ReportI discussed that many indicators are undoubtedly concerning and suggest an “official” economic recession is likely. The inversion of the Fed Funds rate to the 10-year Treasury is the most inverted since 1986 (roughly 10-months before the 1987 market crash.)

Fed funds vs 10-year inverted yield curve.
Furthermore, the most recent release of the Philadelphia Federal Reserve Manufacturing Index showed a sharp plunge in sentiment, suggesting a more pronounced correction than earnings currently represent. Historically, such deep readings of the “Philly Fed” index were associated with harder, not softer, economic recessions.
Philly Fed Index vs Earnings

However, in the short term, it is the technical price action that we pay the closest attention to. Such is because the price action represents the psychology of the market. Those technical indicators were the primary drivers behind reducing exposure to the markets in February and increasing again in March. The vertical lines represent each “buy” and “sell” signal over the last year.

Market trading update MACD buy sell signals

While these signals are not timing indicators to “be all in or out” of the market, they have consistently provided good signals to increase and reduce exposure to equity risk accordingly. Those indicators suggest that investors may be well served to “Sell May” and return later.

The Fed Set To Hike Rates

While the technical indications may be enough warning on their own to reduce risk heading into May, it is worth remembering the Fed is set to hike rates again on the 5th. With each rate hike, we are getting closer to the Federal Reserve breaking something economically or financially. Such has repeatedly been the case throughout history and given the aggressiveness of the rate hiking campaign over the last year, a negative outcome would be unsurprising.

Fed rates and crisis events

So far, the markets have weathered the rate increase much better than expected. However, most of those rate hikes have yet to work through the economic system. Furthermore, the economy has remained buoyed by the massive increase in money supply, which still supports economic activity but that support is also fading as the last vestiges of pandemic support programs end.

M2 ad Percentage of GDP

As we enter the traditionally weak summer months, we must note that the market’s bullish trend remains intact. However, as I concluded this past weekend:

A correction should be acknowledged and expected. A 10% decline would lead to another retracement to the lows of the bullish trend channel, as noted above. If that support holds, that would be a logical place to add exposure to risk assets from a purely technical perspective.”

10% market correction likely.

…If that support holds, that would be a logical place to add exposure to risk assets from a purely technical perspective…Could we be wrong to “sell May” and go away until later? It is certainly possible, and if such is indeed the case, we will add exposure accordingly when needed, however, being cautious heading into the summer may pay extra dividends.

Related Articles from the munKNEE Vault

1.  What Are The Causes Of The ‘Sell In May’ Seasonal Market Phenomenon?

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?

 2. Sell In May And Go Away?

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.

 3. Does Sell In May and Go Away Work?

Does the theory hold water? First, here’s how the “sell in May” idea is supposed to work.

4. Busting the Sell in May and Go Away Myth

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.

5. Is There Any Validity To the “Sell in May & Go Away” Proverb?

Some market participants may be looking to heed the advice of the old market proverb “Sell in May and Go Away”. The question this article seeks to answer is whether this calendar effect is spurious, or whether this is something readers should heed.

6. Should You “Sell In May & Go Away”?

The saying “sell in May and go away” infers that the stock market is seasonally weak from May to September and, as such, one should not own stocks during that period of time. As illustrated in the chart below, however, the stock market is not particularly bearish then. It is merely less bullish (i.e. the odds of the market going down vs. up are equivalent). That’s why “sell in May and go away” is not a good trading strategy. Let me illustrate that fact further in the 10 charts below.

7. “Sell in May and Go Away” – in 9 out of 11 Countries it Makes Sense to Do So

The “sell in May and go away”, which] implies that the market’s performance is far worse in the six summer months than in the six winter months is the case with respect to US stock markets but what is the status in other countries? I have examined the patterns in the eleven most important stock markets in the world and found that it does, indeed, make sense to “sell in May and go away” in 9 of the 11 countries. In which two countries has it not been the case – at least until now? Read on for the answers.

8. Does “Sell In May & Go Away” still hold true? (+2K Views)

One of the most enduring of Wall Street axioms – falling somewhere under “buy low and sell high” but above “greed is good” – is to “sell in May and go away” and, indeed, there appeared to be some truth to the saying. Between 1950 and 2012, the Dow Jones gained an average of 7.6% annually during the November-April period, but only 0.4% during May-October. Does “Sell In May and Go Away” still hold true as a viable investment strategy? Not according to my analysis. Here’s why.

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