Well its that time of the year again and of course the well worn adage of "Sell in May and go away" will once again be touted to the masses.
But just how much truth and relevance is there in this statement?
Well in this article I'm going to delve into it and find out where this whole mindset originated from, how much truth there is in it and what might be the best course of action as this time of year approaches.
So Where Did The Expression Originate?
There has always been a lot of discussion as to where "Sell in May and go away" originated from, and in America it is called the Halloween effect. As an Englishman or Pom, (as we're affectionately known here in Australia), I'm here to tell you that it started in England, and that according to Bouman and Jacobsens 2001 study, "the effect has been noticeable since 1694".
The change in the weather ushered in by the May day holiday in England possibly plays a big part towards this effect. The weather warms up and a whole host of social events kick in. We have the Polo season, Cricket, Royal Ascot, Wimbledon, The Regattas, and a heap of other summer celebrations finally leading up to the running of the St Ledger Cup at Doncaster in early September.
Indeed the original expression was "Sell in May and go away but come back on St Ledger Day".
It seems also that back then the only people who could afford the luxury of participating in the share markets were the English Aristocracy. It's not hard to imagine that due to the huge list of social events over the summer months, drinking at the Regattas or cheering on their side at cricket was much more preferable to trading stocks.
It was just easier to sell up and come back later. There would have been no point hanging around a deserted stock market, when everyone was doing the same.
If you are finding this article interesting there are plenty more where this came, all aimed at helping you to trade better. Just sign up for my newsletter and also get access to my FREE 3 part trading mini-course as well![optinform]
So Does Sell in May Still Hold True Today?
Well this is the question that gets rolled out at this time every year and so in order to determine wether it does or not we have to turn to our charts and look at the hard data to see what they reveal.
As we can see on the S&P 500 chart going back to 1951, we had 40 periods spanning May to October that finished in profit, compared to 25 periods that ended in negative territory. This data appears to contradict the Sell in May theory.
So lets see how the Dow Jones Industrial Average fared over the same period.
As we can see from this set of results it was a bit more evenly matched with 35 May - October periods finishing in profit and 30 showing a loss.
Looking at all this data, it seems that there are more periods that finish up rather than down, so I'm still not convinced yet that I should be selling everything and sitting on the sidelines watching.
The problem with this method of analysis is that it's really only showing us positive or negative movement and not the actual percentage returns for the May - October period compared to the November - April period.
We really need to dig deeper into the data so that we can understand the big picture and make a fully informed decision.
So lets have a look and see what would happen if you bought into the S&P 500 at the beginning of June and then sold out at the end of October. Then compare this to keeping out of the market at that time and waiting to buy in at the beginning of November and then selling at the end of May.
What I found to my surprise when I analysed the numbers and actually calculated the average annual return for the June to October period running from June 1950 until October 2014 was that you would have made an average annual return of just 1.73%.
Compare this to sitting on the sidelines and then buying into the November - May period of the year.
This gave an annual average return of almost 7 times more at 7.49%.
Pretty stark contradiction to our previous data which showed a lot more periods closing higher than lower isn't it?
So it seems there is something in this Sell in May and go away phenomenon after all, but does it hold true for different markets around the world?
If you need need help trading in a more profitable and safer manner, sign up below and get access to my FREE 3 part trading mini-course. You'll also get notifications of any future content the moment it goes up too.
Sell in May - A Global Phenomenon?
Well, as can be seen from the chart below, which is taken from Bouman and Jacobsens study of various stock markets around the world in 2001, it's quite obvious that this is clearly a worldwide effect.
In their very detailed study, titled "The Halloween Effect" they showed that 36 out of 37 developed countries had returns in the May to October period which were significantly lower than those in the November to April period.
The effect was also noticeable in the emerging markets of the world as well, so there goes the theory in regards to weather, cricket, rowing or tennis from what I can see.
Bowman and Jacobsen also explored in their report a whole heap of other possible reasons as to why this phenomenon exists which I would urge you to read, but at the end of the day could find no conclusive evidence for any one particular cause.
I guess for now, the Jury is still out on this one!
So it seems from the evidence that it could well be a good idea to "Sell in May and go away", because the evidence certainly does show that there is a strong pattern of lower returns in the June - November period.
Of course it doesn't work every year, and some years have seen big returns over this period, as well as gigantic falls. So it's always going to be a bit of a punt in my opinion. It probably pays not to blindly follow results from the past either.
What I would strongly suggest is to revert back to the chart of whatever it is you are holding. Look at the price action, does it look weak? Is the stock making a top? Is it time to tighten your stops?
These I think are the real questions to ask, because with so many different types of stocks in so many different sectors, every situation is going to be different and while one sector may well go down in that period there are always others that will go up.
Anyway, I'm off to oil my cricket bat and get my polo gear ready.
Anyone for tennis?