Examining the 'Sell in May, Go Away' Axiom

Where is the stock market heading? Has the rally that started in early March been exhausted? These are the key questions on all investors’ minds as financial markets remain caught between the frantic actions of central banks to get the cogs of the credit system and economy turning again on the one hand, and a still shaky economic and corporate outlook on the other.

It is therefore no wonder that even so-called “pop analysis”, including some legendary axioms, is resorted to in a quest for direction. And besides “buy low and sell high” few other axioms are more widely propagated than “sell in May and go away”. A Google search revealed an astounding 127,000 items featuring this phrase.

As equities have seen a particularly strong six-week rally, followed by what looks like the start of a consolidation/retracement of some of the recent gains, investors are justifiably questioning the market’s next move. And they nervously wonder whether this May will not only herald longer days in the Northern Hemisphere, but also live up to its reputation as the advent of a corrective phase in the markets.

The important issue, however, is whether this axiom actually has any scientific basis at all. Analyzing historical returns, the figures vary from market to market, but long-term statistics seem to show that the best time to be invested in equities is the six months from early November through to the end of April of the next year (”good” periods), while the “bad” periods normally occur over the six months from May to October.

A study of the MSCI World Index, a commonly used benchmark for global equity markets, reveals that since 1969 “good” periods returned +6.5% per annum while investors were actually in the red by -1.0% per annum during the “bad” periods.

“Sell in May and go away” also holds true for the US stock markets. An updated study by Plexus Asset Management of the S&P 500 Index shows that the returns of the “good” six-month periods from January 1950 to March 2009 were 7.9% per annum whereas those of the “bad” periods were 2.5% per annum.

A study of the pattern in monthly returns reveals that the “bad” periods of the S&P 500 Index are quite distinct, with five of the six months from May to October having lower average monthly returns than the six months of the good periods. Interestingly, May - the first month of the bad patch - is the only exception.

Click to enlarge:

Historical average returns from May to October in emerging markets also tended to be weaker than those from November to April, as shown in the graph below (hat tip: US Global Funds).

But what exactly does this mean for the investor who contemplates timing the market by selling in May and reinvesting in November? Further analysis shows that had one kept the investment in the S&P 500 Index only during the “good” six-month periods, and reinvested the proceeds in the money market during the “bad” six-month periods, the total return would have been 10.5% per annum.

These calculations do not take tax into account. And, of course, every time one switches out of and back into the stock market there are costs involved, which would also reduce the returns for the market timer.

How did the good and bad periods stack up during the past two years? The results are as follows.

• May 2007 - October 2007: +4.52%
• November 2007 - April 2008: -9.62%
• May 2008 - October 2008: -30.1%
• November 2008 - April 2009: -5.1%

Some you win, some you don’t! It seems that the axiom “sell in May and go away” in itself is a rather doubtful basis for timing equity investments. However, it may serve a useful purpose as input, together with other factors, to otherwise rational decision making.

Comments

[Larry House:]

Solid dividend-paying stocks still produce income during the "off" months and avoid transaction expenses. I really don't think "sell in May..." should be a factor for investors or traders. We have seen some pretty good summer rallies in the past. Doug Kass is calling for one this year. Time will tell.

Apr 29 01:46 PM

[Malkiel:]

I don't think we need the pro forma tax and expense disclaimers any more--with so many types of nontaxable retirement accounts available through discount brokerages let's just make the assumption going forward in these type of arguments that a retail investor will (or at least should) always be buying and selling without tax consequences or substantial expenses.

Most investors big and small are down severely at this point in the 2009 calendar and I would expect them to stay in the game from May-Oct rather than go fishing...

Apr 29 05:20 PM

[Mad Hedge F...:]

Sounds good to me. There is something wrong with this picture. The Chinese stock market is shouting at us that the bull market is back, while the price of crude is telling us in more surreptitious tones that this is a bear market rally that will fail. If we were in a true economic recovery, crude would have run back up to the $70-$90 range by now. Who is right? Certainly large scale Chinese buying of economically sensitive commodities like crude and copper has been the hallmark this seven week move in global equity markets, which have brought a welcome $7 trillion boost in valuations. But how much of the move has been mere short covering? What is the extent of the dead can bounce? Until a recovery in corporate earnings signals the “all clear” we could be stuck in a trading range here, possibly until the end of the year, and maybe for years. “Sell in May and go away” is looking better by the day. Sell a few short dated calls above the market against your long positions. Pass the sunscreen?

Apr 29 06:06 PM

[Tony Petroski:]

Watch out for October, for the market rolls over.

Apr 29 07:55 PM

[Donkey Kong:]

Where do you find the time to post 1,359 comments Mr. Perma Bull?



On Apr 29 02:22 PM Cetin Hakimoglu wrote:

> 'Sell in May Go Away' axiom will fail this year. The momentum is
> overwhelmingly bullish and the economy is improving.

Apr 29 09:20 PM

[floortrades:]

Short calls from here on out. 925 is as far as this can go.

Apr 29 09:23 PM

[johngonole:]

The axiom itself is going to give people a reason to sell off the rally. Companies with strong name recognition have rallied to far to fast and will give some of the gains back. I think the dow could touch 7600 again.

Apr 30 02:01 AM

[Lilguy:]

The axiom is especially useful to small investors who invest in index mutual funds or ETFs. While there are clearly other factors to consider, not least of which may be taxes on gains (good luck with that!), there is no reason to try to fight some pretty obvious patterns in the market.

Moreover, speaking at the moment, if you've made some gains in the latest rally, it may be time to bring those puppies home. I can't see the current bear rally going much further and retrenchment could be fast and furious.

And, you know what, you can have a nice vacation sometime over the summer without worrying about whether your mufu or ETF is tanking. The stock market is far from the only place to gain satisfaction.

Apr 30 10:34 AM

[Living4Divi...:]

'Sell in May Go Away' - should be restated as 'Sell in May And Pay Higher Commissions, and Taxes' ...too bad it doesn't rhyme

Apr 30 11:11 AM

[User 305589:]

It will work this time - but people won't believe it. underinvested investors will get suckered in by this extended and further extending rally and the market will likely approach 950-1000 points (S&P500) by June. then the market rally will slowly fizzle and the market will drop throughout summer. By september/october the s&p will be right back in the 750-850 range and the freshly suckered in buyers will get nervous but will pin their hopes on 'the huge pile of money' that is waiting on the sidelines. trouble is, there is not as much money waiting as they believe and it may not buy as much as they need. Then the market will drop towards the march lows and through them and people will run scared. Then we will approach the real bottom around 500 points in the s&P .
thats my scenario right now and of course my guess is as good as anyone else's.

Apr 30 11:27 AM

[CloroxCowboy:]

Cetin, stop wasting server space with your nonsense! You only need to make one blanket post per quarter telling everyone that you're still a perma-bull.


On Apr 29 02:22 PM Cetin Hakimoglu wrote:

> 'Sell in May Go Away' axiom will fail this year. The momentum is
> overwhelmingly bullish and the economy is improving.

Apr 30 01:04 PM

[sticktoitiv...:]

Cetin has a negative 5551 rating on this site, that's a lot of thumbs down.

Apr 30 02:51 PM

[asaf123:]

Chrysler just filed, Mexico shuts down entire economy, Taliban are 50 miles from Pakistan capital…but the stock market rose 4% on this news since it beat expectations that the Taliban would be only 20 miles from the capital.

Maria Bartoromo on CNBC reported “the stock market is rallying on this great news that the “rate of advance” for the Taliban is slowing down. Whereas last week they were gaining 10 miles a week, this week they only came 5 miles closer to the Pakistani Nuclear weapons launch center.”

Jim Cramer added: “if this great news keeps up, I expect the Dow to rally past 10,000 by Mother’s Day. Also, analyst expect 5-10M deaths in the event the Taliban set off a nuclear weapon. However, if the actual fatalities come in at the low end of the range, this bull market could continue into the summer.”

Apr 30 03:24 PM

[The AntiCramer:]

It is actually rather simple when all you're doing is copying and pasting the same nonsense. I've yet to read a single comment by Cetin that shows any critical thought, logic, reason, or evidence.


On Apr 29 09:20 PM Donkey Kong wrote:

> Where do you find the time to post 1,359 comments Mr. Perma Bull?
>
>

Apr 30 07:57 PM

[VP of Commo...:]

Re: Cetin

The amount of posting and subsequent distaste is quite impressive, if only for shear volume.

Re: Sell in May and Go...

It sure looks like one should be in the market all year except for September and October, because May-August are all better months than those two.

Re: Sell in May... Or not

I thought this axiom was crap before I read this article, now I'm sure of it. The dow is down six quarters in a row, I wouldn't sell now unless something really bad happened (9/11? Swine Flu goes bonkers?) or I was forced at gunpoint (even less likely).

Apr 30 08:12 PM