Sell In May And Go Away?

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 |  Includes: DIA, QQQ, SPY
by: Nate Sterling

Much has been made of the stock trader's old adage "Sell in May and go away." This adage in fact goes back over 100 years, but still curiously has remained a rigorous statistical phenomenon, even though it has been widely known, and usually widely known timing strategies tend to become less and less statistically significant as traders try to capitalize on them.

As for me and my investments, the inner investor in me says to stick with my investments for the long term and don't worry about trying to time the markets or brief market volatility or brief market corrections. However, the inner trader in me is constantly worried and constantly thinking I should be trading Mr. Market's schizophrenic mood swings. The sell in May and go away thesis has shown itself quite rigorous and valid over 50+ years, so it is hard to ignore.

However, really you must analyze it further than 6 months risk-on (November through April) 6 months risk-off (May through October) like the stock traders' almanac implies. Instead, you should break it down month by month to get a more detailed picture of how you should be trading, if you are a market timer. The worst month by far is September. Historically on average, you would do okay by being invested throughout the year and just being out of the market in September or actually shorting the market in September. The market is, on average, up every month except for September and February, with February being just slightly down on average. Over the past 40 years for the S&P 500, on average, May is up .72%, June is up .29%, July is up .25%, August is up .08%, September is down .77%, and then October is up .58% kicking off the historically positive months of November up 1.15%, December up 1.71%, January up 1.22%, February down .19%, March up 1.15%, and April up 1.56%. See chart below sourced from squirrelers.com. Average Monthly S&P ReturnsClick to enlarge

So, in conclusion, my brief analysis is that one should be short the market or out of the market in September, but otherwise one can be a long term investor and just ride out Mr. Market's transitory mood swings the rest of the year. However, there is a big caveat: one should keep in mind that these are averages over many years and that any particular year can be quite different than the averages.

For example, if one were to just blindly follow the historical averages, in a one-off type of year, September could be up and December down. It just so happens that last year, 2012, was such a year. So please don't just blindly follow historical trends or averages. Much more needs to be factored into one's analysis, including corporate earnings and fundamentals and the Fed and macroeconomics and the outlook in Europe and Asia, to name just a few. We live in a very interconnected world, an increasingly small globalized world, in which all micro and macro economic factors need to be analyzed and evaluated.

Disclosure: I am long GNW, WDC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.