Sell in May (or Maybe June), But Don't Go Away

Everyone in the financial world is familiar with the old adage, “Sell in May and go away; don’t come back till St. Leger’s Day.”* Like most of these sayings that have been around for eons, there’s probably a ring of truth to it. But being a confirmed skeptic, I decided to see for myself.

Putting the adage to the test
So, what I did was to examine the chart of the S&P 500 since 1996 looking for indications to support this theory. I found that, indeed, the market always took at least one summer dip (usually in the middle of July). Not only that, but after the dip, a rally always followed. So much for the “stay away until St. Leger’s Day” part of the proverb! Had you followed this advice to the letter you would have missed out on some important rallies.

Let’s take a closer look. Below is a chart of the dip dates and values: pre-summer dip peak, summer dip low, and post-summer dip peak. In four of the years (1998, 1999, 2000, 2006) there was a double-dip. Those generally occurred in choppy markets.

You can see that the “Sell in May” clause isn’t strictly true; some of the peaks extended into the middle of June. For those four years with two dips, the first dips generally did peak in May and found their lows in the middle of June. In all of the other years, though, the pre-dip peak occurred later, generally from the middle of May to the middle of June. The lows following those peaks occurred about a month later from the middle of July to the middle of August, although in 1997 there really wasn’t much of a dip. However, in every single case a rally ensued lasting a little over a month on average.

The next table shows the summer dip stats. (Originally, these two charts were all one table but I broke it up for space considerations.) The pre-dip peak to the summer low gave yielded almost 10% on average if one were to short the index at the peak value and cover at the summer low. It took a little over a month on average to realize this return. And if one were to turn around and go long at the summer low and hold until the next peak value, one could have realized an even larger average gain and at a lower risk, too (4.8% compared with 7.2%). Of course, these statistics represent perfect market timing which is a skill that I, for one, don’t possess.

Summary
The moral of this story is that yes, it does pay to sell sometime in early summer, but it definitely does not pay to stay away until the autumn leaves begin turning color. What does pay is to keep an eye out for that one or possibly two summer low values and ride it up for the next month or so. Maybe what the market is doing right now is putting in its pre-summer peak; the only way we’ll definitely know is when (and if!) it makes a subsequent low. When it does, then I’ll be jumping in with both feet.

* St. Leger’s Day is a horse race held at Doncaster Racecourse (in England) in the middle of September.

Comments

[Ray Winter:]

I find a far better measurement on a market's volatility occurs around the times that the accrued credit card debts of the Stock Trading Heavies have to be paid. So be extra cautious in the period between the time the Traders get their CC bills and the time thay have to be paid, following their Christmas, Skiing and Summer vacation periods.

Jun 10 09:42 AM

[Mad Hedge F...:]

Way to go, Doc. The market has gotten so dead here that I have started watching Suzie Ormand to get trading ideas. So I’m not supposed to run large balances on my credit card? Who knew? A hedge fund friend told me that the market is now like watching a ball tossed in the air that is at the apogee of its move, just before the free fall begins. No news, with shrinking volume and volatility. General Motors (GM) isn’t a stock anymore, so all of the news flow there might as well be a History Channel documentary. You can only sell so many out of the money short dated calls on other stocks before bumping up against risk control parameters. Even if you do make money in these conditions, it is at the expense of a Maalox addiction to fight the multiple holes in your stomach. It’s not worth it. This is why I prefer to spend my summers mountain climbing or practicing my ballroom dancing. Please see my “Sell in May and Go Away” opus at (www.madhedgefundtrader...

Jun 10 10:49 AM

[Larry House:]

September-October have been some dangerous months in the markets even with healthier markets than we have now. I don't believe in selling or buying because of the calendar. It is a time to be careful and to hedge as much as possible.

Jun 10 12:18 PM

[je:]

Maybe after JP Morgan and the bunch get rid of their secondary offerings the boyz will let the market correct.

Jun 10 01:53 PM

[Alphameister:]

Especially where emerging markets are concerned, 2009 looks a lot like the US market in 2003 when it would have been a very bad idea to "Sell in May and go away."

Jun 10 01:58 PM

[ebworthen:]

"Sell in June or sing a sad tune."

We are rhyming with June 1930.

Your charts are for the past 12 years, have you done calculations going further back?

I would posit that the moment we are in is nothing like any of our previous recessions or corrections, therefore, extrapolating to this adage would be unwise.

I'm really frustrated with technical analysis in general that assumes regression to the mean and ignores the possibility of a historic outlier event like 1930-1933.

The macro picture is: rising unemployment, foreclosures, REIT failures, credit card and debt defaults hitting historic levels, deflation with a whiplash to inflation within 18 months and socialist government policies (ownership of automakers, banks, insurance companies, KELO decision, cap and trade energy tax, etc., etc.).

This is not a climate for a recovery; it is a climate for a crash or a sideways grind for years to come.

Jun 10 02:15 PM