Sell in May? No Way!

Today we'll analyze the "Sell in May, Go away" axiom. It makes perfect sense that the market would consolidate starting in May as many investors / brokers / money managers etc... take their summer vacations. But what about for the month of May after the recession has been declared over?

So to test the old theory I have built an Excel spreadsheet with the S&P 500 data downloaded from January 1950 until April 2009. First I calculated the average for all 59 months of May from May 1950 to May 2008. I then calculated and average for the months of May following each recession's declared end. The list of recessions used are as follows (date declared start - date declared finished):

JULY 1953 - MAY 1954
AUGUST 1957 - APRIL 1958
APRIL 1960 - FEBRUARY 1961
DECEMBER 1969 - NOVEMBER 1970
NOVEMBER 1973 - MARCH 1975
JANUARY 1980 - NOVEMBER 1982
JULY 1990 - MARCH 1991
MARCH 2001 - NOVEMBER 2001

Therefore the months of May used for this analysis were: May 1954, May 1958, May 1961, May 1971, May 1975, May 1983, May 1991, and May 2002.

All returns are the average for the months of May in the S&P 500:
Overall average from January 1950-April 2008 (59 Mays) is +0.33%
Excluding the months of May directly after recession is declared over (51 Mays) is +0.21%
Months of May directly after recession is declared over (8 Mays) is +1.08%

***NOTE*** If we exclude May 1954 since the recession was declared over in May 1954, the months excluding becomes +0.27% and May after recession average becomes +0.77%

5 of the 8 months of May following the end of a recession (or 4 out of 7 if you exclude May 1954) finished the month with a gain. The average gains for the months of May following a recession are 500% greater than those not following a recession, and over 325% greater than the overall average for May dating back to 1950. To download the spreadsheet used in this analysis click here.

So if May is higher what will the following month of June bring? The data from my analysis shows that June is higher by an average of 0.05%, while a June not following a recession is higher by 0.17%, and a June following a recession is lower by 0.77%.

So far over the 2 days the market has been open this May, the S&P 500 is 2 for 2 and has done extremely well, up 3.9% with financials leading the way. Bank of America (BAC), Wells Fargo (WFC), American Express (AXP), Goldman Sachs (GS), JP Morgan (JPM), Bank of NY Mellon (BK), and even Citigroup (C) have all been up BIG, even with the stress test results to come out in less than 3 days. At this pace we are on track to break the record for May- May of 1990 up 9.2%! If the S&P 500 finishes May higher than the average, could this indicate the gloomy days are behind us?

Disclosure: Long AXP, BAC, GS

Comments

[marcopiero:]

hmmmmm......no.
We have experienced and unfortunately still are experiencing history in the making. Unlike any other Presidency, the U.S. Economy has never seen so many crisp dollar bills pumped in it. Therefore once the spree is over (and it better be soon for the sake of every single American citizen) we will see the effects and it won't be nice.
Maybe May could end up in the green (I seriously doubt it) but get ready for a nasty summer since you cannot hide the cancer with fever pills.
Commercial real estate, unemployment and who knows whatever might rule the headlines all summer......

May 05 06:36 AM

[yellowhoard:]

We're not really stimulating anything when we're taking money from the productive part of the economy and letting the government choose where it is spent.

So, we'll get a high speed rail project from Disneyland to Vegas. And, every profitable company in America will cut their investment budget.

May 05 09:34 AM

[Mad Hedge F...:]

There are no decent risk/reward trades in the market right now. All of my long recommendations, like emerging markets, commodities, crude, and junk bonds, are through the roof. My shorts have cratered, with the 30 year Treasury bond futures down a whopping 20 points, from 142 to 122. All of my longs are way overbought, and my shorts are oversold. I can’t in good conscience ask traders to just sit on big unrealized profits. Never slap a double in the face, especially in this environment. Nobody ever got fired for taking a profit. Always leave the last ten percent for the next guy. There is no law that says you have to trade every day of the year. Better to reestablish at better prices, like in August. If you strapped on any of these trades, the first four months of 2009 gave you a great year. If you didn’t, don’t break your back playing catch up. It’s not worth it. As for me? I’m going down to Vegas to shop for condos at ten cents on the dollar and do some actual gambling.

May 05 10:46 AM

[PROXIMO:]

Convoluted analysis. Since the data as it stands does not bode well for the month of May, the recession is magically declared over and new calculations are made, in order to justify higher stock prices. Then June is logically determined to move higher, since that is what it does after a post-recession higher May move. Further, since the first two days of May were up days, a record breaking month of May is the logical next step. Please. The first two MINUTES of May are probably at least as valid as the first two days in forecasting the entire month of May.

May 05 11:10 AM

[Hot Richard:]

I had a dream I was on a beach. I saw the tide go out and it revealed naked swimmers. A man in a helicopter swooped in and dropped buckets of water on the naked people (some attractive) who rejoiced. Then I looked at the newspaper and saw a headline about a shortage of potable water. Many of the naked people started flapping their arms as if treading water. Several fish, unimpressed by the helicopter, died. I realized that sometimes naked swimmers without any water can actually be a good thing, but never for swimming.

I haven't seen any value created in America. In fact, I still see more daily value destruction than creation...naked people flapping their arms be damned.

May 05 01:01 PM

[yellowhoard:]

I've never been able to connect my naked people dreams with economics.

Well done Richard.

May 05 01:11 PM

[Trade Winds:]

I realize recessions are not declared officially "over" until months after the fact, but I suspect most people would agree this one is not "over" yet. Perhaps we can revisit this article next May.

May 05 07:04 PM

[Freya:]

The spending spree is on schedule to take years. It will really Start in earnest next year, Stimulus package and Health care, with a little Capex for flavor and whatever else gets Porked in.

Budget Deficits in the Trillions for years to come. And it could be much, much higher as inflation kicks in. You will have to wait a very long time for the Spree to end.

May 05 07:22 AM