Sell in May and Go Away: Proven Seasonal Strategies for Any Investor
by Sy Harding, SyHardingblog.com
Monday, June 14, 2010
“Sell in May and Go Away” sure did work for this May, the worst month of May for the stock market since 1962, and so far the month of June hasn’t been much better.
But for how long should any investor go away? Two months? Three months? July is usually a pretty good month for a summer rally, isn’t it?
You could decide that, given the continuing global economic recovery, and that interest rates remain low and accommodating, the 10% correction already seen is more than sufficient and is already over.
Or you might judge that the contagious debt crisis in Europe will spread, and combined with the austerity measures being imposed in European countries will slow global economies, and that hasn’t been factored into stock prices by a mere 10% correction.
You could determine that investor sentiment remains too bullish and complacent for a correction bottom to be in yet, and that corporate insiders are still selling and usually begin buying again before a market correction ends.
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Or you might look at technical charts and conclude the market is short-term oversold and due for at least a short-term rally that could get something going on the upside and leave the correction behind.
However, you could also look at convincing research that seems to say you don’t have to guess how long to stay away, don’t have to suffer headaches trying to fathom what cold winds blowing around the globe from Europe and China, or disappointing jobs or retail sales reports might do to the economic recoveries, and therefore stock markets.
“Sell in May and Go Away” – The Annual Seasonal Pattern Explained…
There is a mountain of evidence that supports the annual seasonal pattern from which the mantra “Sell in May and Go Away” was born.
- It says sell everything on May 1, and stay away until November 1, standing aside for the entire unfavorable period between when history shows the market experiences most of its serious corrections and only rarely experiences meaningful rallies.
- Though investors must recognize that the market does not top out into a correction on the same day in the spring every year, nor does it launch into a rally on the same day in the fall each year.
In 1999 I introduced a similar strategy that has been one of the portfolios in my newsletter. The strategy is also based on the market’s annual seasonality, but utilizes a technical ‘momentum reversal’ indicator to better identify the best entry and exit dates each year. Its simple rules, over the last 11 years, resulted in a gain of 124% compared to a gain of 6.6% for the S&P 500 over what has become known to investors as ‘the lost decade’ (in which two bear markets have devastated portfolios). Meanwhile the worst annual decline of the seasonal investor in those 11 years was 4.2%.
So, the market’s annual seasonal pattern says stay away until the October/November time-frame.
A Consistent Historical Market Pattern – The President’s Second Year
Another consistent historical pattern may also be the second year of the current Four-Year Presidential Cycle.
Since at least 1918, the stock market has experienced a substantial rally from the low in the second year of every presidential administration to the high in the following year. That rally has averaged a gain of 50% for the Dow.
A study published in 2005 by Dr. Marshall D. Nickles of Pepperdine University showed that for the period from 1942 to 2004, if an investor bought the S&P 500 index on October 31 in the second year of each presidential term, and held until December 31 of the following election year, he would not have lost money in any of those periods of being in the market, and would have gained a total of 7,170% (not counting interest on cash when out of the market).
He compared that to being invested only in the opposite periods, where an investor would have had losses in six of the 13 periods, the largest of which was 36%. And rather than see a 7,170% gain over the period, they would have seen their original investment shrink by 35%.
Proven Seasonal Strategies for Any Investor
So there you have proven seasonal strategies that say the odds are – that the low for the year – will not be seen until at least August, but more likely not until the October/November time-frame.
The February low that we experienced was probably not the market low for the year, and short-term rallies notwithstanding, the low is still more than likely several months away.
Sy Harding
Syndicated at Stockhouse.com. Sy Harding is president of Asset Management Research Corp., editor of Sy Harding’s Street Smart Report, and has been consistently ranked in the Top-Ten Timers in the U.S. since 1990 by Timer Digest.
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Related Investment U Articles:
- What You Need To Know If The Market Rallies
- A Bearish Case for November 2011
- Forget the “January Effect”… Use The “Siegel Indicator” Instead
- Six Reasons Why This Bull Market Could Keep Charging
- The Best Trade You Can Make in November
One Response to “Sell in May and Go Away: Proven Seasonal Strategies for Any Investor”
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Sy – you didn’t mention the 10/06-12/08 period – when the Dow went from 12,081 to 8,376 – a loss of 31%.
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