Sell in May Indeed?

May.23.07 | About: SPDR S&P (SPY)

We've all heard the axiom to "Sell in May and then go away." Does it have any scientific basis?

My South African friend Prieur du Plessis of Plexus Asset Management notes that the long-term statistics support the notion that the best time to be invested in equities is the six months from early November through to the end of April, while the “bad” periods normally occur over the six months from May to October.

Surprisingly, this is true globally also:

A study of the MSCI World Index, a commonly used benchmark for global equity markets, reveals that since 1969 "good" periods returned 8.4% per annum while investors were actually in the red during the "bad" periods by -0.4% per annum. Interestingly, this phenomenon – of "good" period returns outperforming those of "bad" periods – applied to all 18 markets where MSCI computed index returns.

“Sell in May and go away” also holds true for the U.S. stock markets. A study by Plexus Asset Management of the S&P500 Index shows that the returns of the “good” six-month periods from January 1950 to December 2006 were 8,5% per annum whereas those of the “bad” periods were 3,2% per annum.

A study of the pattern in monthly returns reveals that the “bad” periods of the S&P500 Index are quite distinct with every single one of the six months from May to October having lower average monthly returns than the six months of the good periods.

A review of the basic monthly returns since 1950 shows the weaker periods:


chart courtesy of Plexus Asset Management

The summer months are particularly slow; also impacting returns -- the crash-worthy tendencies of September and October.