'Sell in May''s Mixed Results

I have been seeing a lot of articles in the financial media about the "Sell in May and Go Away" strategy. This strategy has a good long term record in most of the world's stock markets. An interesting research paper "The Halloween Indicator, Sell in May and Go Away: Another Puzzle" by Bouman and Jacobsen (1999) looked at the November-April versus May-October time periods in many different international stock markets.

In 36 out of 37 countries, the November-April time period had superior stock market returns. This pattern has also occurred in the UK stock market which has been around since 1694. The authors found that the most likely cause may be the extent and timing of vacations. This makes some sense, since money spent on a vacation is not put into the stock market, and people on vacation are generally not active stock market buyers during that time.

Recently, Sam Stovall of Standard & Poors published an article recommending a variation on the "Sell in May" strategy which allows you to stay invested by focusing on specific market sectors. Stovall looked at S&P sector data from 1990 to the present, and found that the overall market only gained 2.1% on average in the May-October periods. On an annual basis, this is around 4.2% which about the same as being in cash. But Stovall found two sectors did better in the May-October periods- Consumer Staples gaining 5.3% (or over 10.6% annualized) and Health Care gaining 5.7% (over 11.4% annualized). He suggested switching into these two sectors instead of going into cash.

I decided to take a look at this strategy using more recent data from relatively liquid ETFs that should be quite tradable:
(IYH) - Ishares Dow Jones US Health Care
(XLP) - Consumer Staples Select Spider

There are several variants to the 'Sell in May' strategy. The most popular variant is probably Sy Harding's where he times the specific entry and exit using the MACD technical indicator. I believe Harding has not yet given the sell signal for this year, but his finger is on the trigger and the sell can come any day now. But I decided to use the original complete May-October time periods.

Overall, the strategy was pretty disappointing over the last years.

The average return for IYH was minus 1.6% and total compound return over the 6 periods for IYH was minus 10.5%. This is worse than the S&P 500 which had an average return of minus 1.15% and a compounded 6-period return of minus 10.4%. For XLP the average return was minus 0.3% and the compounded 6-period return was +2.8% which beat the S&P, but still lagged cash which would have earned over 10% for the three years (six semi-annual periods of six months each).

I would say the strategy of switching to defensive ETFs like IYH or XLP for the May-October has mixed results at best over the last six years. I think a better strategy may be to switch to more market neutral strategies like I discussed in my TAXI post, or to combine buying IYH or XLP with the writing of covered calls.