Every year as the month of May arrives, we tend to see many discussions about the old adage "Sell in May and go away" (until after Halloween). As the Wall Street Journal noted on May 2nd, in Stocks Greet May With Rare Rally, this year May started well (though the market has dropped for three straight days since then). In the prior six years, April stock market returns outperformed May returns each year by an average of 5%, which doesn't bode well for May given April 2012's flat return (if you believe the pattern will continue).
While many have commented on the "Sell in May" discussion, few tend to research it thoroughly and cite the academic research on the topic. Mark Hulbert (as is often the case) does cite the historical research both in the US and abroad, which does include some justification for the theory. In Should you sell in April? (4/2/2012), Hulbert refers to The Halloween Indicator, "Sell in May and Go Away": Another Puzzle from Sven Bouman and Ben Jacobsen, which was published in December 2002 in the American Economic Review (early version). They found that the pattern has existed historically in 36 of 37 countries studied. In each of those countries, average stock market returns from Halloween through May Day (“winter” months) were significantly higher than equity returns from May Day through Halloween (“summer months”) and almost all of the stock market’s long-term returns were produced during the winter months. Per Hulbert, since mid-2002, following a sell in May and buy on Halloween strategy would have returned 7% annually versus 5.4% for holding throughout. Hulbert also followed up on 5/2/2012 in May doesn’t have to be bad for stocks discussing the argument that seasonal weakness between May Day and Halloween is caused by the timing of investors’ and traders’ summer vacations.
Edwin Maberly and Raylene Pierce followed up on that study with Market Efficiency Withstands another Challenge: Solving the “Sell in May/Buy after Halloween” Puzzle in Econ Journal Watch (2004). They point out that the declines in the October 1987 stock market crash and the August 1998 collapse of the hedge fund Long-Term Capital Management had a major impact on the results, drawing into the question whether it is an exploitable anomaly. They also recall a quote from Richard Wyckoff - "the only unchangeable thing about the stock market is its tendency to change."
Whether or not it makes sense to sell in May from an investment (as opposed to speculating or gambling) perspective, some people may want to ask whether they will sleep better if they sell or at least rebalance. One prediction I will make is that you can be sure there will be a lot of articles written on the topic come May 2013. Some additional discussions on the topic include the following.
- Halloween Indicator at Wikipedia
- Go away in May? from Ed Yardeni (5/2/2012)
- The May/June "Disaster Area" (data from The Stock Traders Almanac) from Cullen Roche (5/2/2012)
- Sell in May and Go Away...except in election years by James Bianco (5/2/2012) and Sell in May from The Chart Store (4/30/2012) via Barry Ritholtz.
- Sell in May and Go Away? in Financial Planning (4/25/2012)
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