Sell in May and go away, maybe not this year

Sell in May and go away: at your own peril

Well, we’re deep into May 2013 and it would be kind of weird not to mention the old investment saw, “Sell in May and go away”. It might surprise you, but it’s been good advice in most years, so let’s see how much wisdom lies herein.

Jim Brown makes two points through his writings and research:

Sell in May? We are at that time of year when investors have to decide if they want to take profits and move to cash for the summer or risk losing those profits in the next correction. The Stock Trader’s Almanac has made the “Sell in May and go away” trade one of the most visible trends in the market. Because the markets normally decline in the summer, they came up with the best six-month trading system. If you had invested $10,000 in the Dow in 1950 and only kept the money in stocks from November through April, you would have had $684,073 as of the end of 2011. If you reversed the strategy and invested for the May-October period, you would have lost $1,024 over the same 61-year period. That is a pretty telling statistic, and the cycle rarely fails to produce.

Art Cashin followed up the next day:

Mark Hulbert suggests it may be a much older multi-national phenomenon. The “sell in May” pattern also exists in other countries besides the US. Ben Jacobsen, a finance professor at Massey University in New Zealand, reached that conclusion after studying all available historical evidence from each of 108 separate stock markets around the world. For example, his statistical tests detected the seasonal pattern in the United Kingdom stock market as far back as 1694.

Jacobsen, in an interview, emphasized that the Halloween Indicator isn’t merely the product of a shameless, after-the-fact data-mining exercise. He said that he found an article as long ago as 1935 – in the Financial Times – in which the “sell in May” pattern is referred to as something that was already well-known and followed.

Even though the pattern nearly 80 years ago already had a solid historical foundation, Jacobsen notes, since then the difference between the average returns in winter and summer has become even bigger.

This is a crucial point, he argues, since the all-too-usual tendency is for patterns to begin to evaporate once investors become aware of them and try to exploit them.

Had one followed the pattern since 1950, one would have generated a total return of 6,717% or an annualised return of 7.05%. I am confident most fund managers would consider this to be an expectable final score before kickoff.

So what are we to do this year? Our dilemma lies with two issues;

  1. That “The tendency is for patterns to begin to evaporate once investors become aware of them and try to exploit them.”
  2. The financial markets are flush with cash and interest rates have been near zero for nearly five years.

If we are not invested we could potentially be losing out to the massive cash inflows into the equity markets and the rising tide that is following. Investors have lost prudence patience and are willing to take on risk in order to stop the guaranteed losses to their assets in cash.  Cash is no longer King and that is being translated into Equity markets nearing all time highs.

We have the long-term view on markets and will for now remain invested, if only as the alternative means a certain loss.

Stay in May and pray for a better day…

3 comments

  • Many thanks for your interest in our article. Our content is original and in all cases recognition is given to external authors where their work is esteemed to be included in our writings. PSG

  • I am confused by your ending paragraph(s) which state in the first instance that markets are reaching near all time highs but that you remain invested and ‘pray for a better day’. Is this part of your investment philosophy or strategy (praying for a better day)? All time highs would suggest over-heated markets and this translates into risk of loss when they come falling back down.

  • Thank you for your valuable contribution and interest in our article.
    Our investment horizon is long-term and our investment philosophy states that we do not attempt market timing. Not being invested and losing out on even a handful of good days significantly impacts on the performance of your portfolio. It could reduce the annual return by as much as half. Maybe this is a topic for another day.
    There are two things worth remembering here:
    1. There are no upper limits for markets. The mere fact that they are approaching old/new highs does not mean they will not move even higher. In fact, it is the reason why markets are higher than they were 10, 20 or 30 years ago. This is also why long-term investment in stock markets tends to provide some of the best return on investment. The trend is positive even though the markets go up and down in the short-term.
    2. We are not dealing with normal investment markets at the moment. Central banks worldwide have been creating money and this glut is flowing into markets. At this moment it is not showing any signs of stopping, and while returns on cash are low, we expect this trend to continue. The rise in stock markets has little to do with economic fundamentals, but rather an abundance of money.

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