Is 'Sell In May' A Reality Or A Myth?

| About: SPDR S&P (SPY)

Summary

Is “Sell In May” A Reality Or A Myth?

I used the data of the last 10 years, which proved my instinct wrong.

The "good" semester of the year has outperformed the "bad" semester by 6.6% every year on average.

There is a well-established notion in markets that investors should "sell in May and go away" every year. More specifically, the strategy involves selling all the stocks of a portfolio on May 1st, remain on the sidelines for 6 months and repurchase the shares on November 1st. As there are many myths in the market, I wanted to study the real data and draw solid conclusions based on that data. To this end, I examined the average performance of S&P (NYSEARCA:SPY) in each of the 12 months of the last 10 years and I detail the conclusions from the study of the data in this article.

Some readers may claim that May has already passed so the strategy cannot be applied this year. However, S&P has rallied 2.7% since May 1st and hence those who consider implementing the strategy but have not pulled the trigger yet can start now from a much more favorable point.

First of all, there are many well-established seasonal patterns in the market, which have emerged from the study of market behavior for decades. Apart from the above pattern, other patterns are the "January effect", the "Santa Claus rally" and the "Presidential Election Cycle". While these patterns were pronounced in the past, their increased popularity in the recent years has caused them to somewhat fade lately. More specifically, these patterns have either weakened in the last few years or they have taken place earlier than before, in anticipation of a repetition of history. Therefore, I have to admit that I expected to observe minimal difference among the 12 months in the S&P returns. However, the results greatly surprised me.

More specifically, the average performance of the 6-month period from May to October was -1.0% whereas the average performance of the 6-month period from November to April was 5.6%. This is a striking difference between the two periods under study, which proves that the strategy "sell in May" is still alive. Therefore, while the efficient market theory predicts that no such anomalies should exist for long, the historical pattern is still prominent and hence no-one can accuse investors of focusing on this trend every year.

One could partly attribute the remarkably great performance of March (3% average return) to the fact that the ongoing bull market started in March-2009. As bull markets enjoy extremely high returns in their beginning, March exhibited a 12% return in that year. However, in 2009, the 6-month period from May to October was still in the very beginnings of this bull market and hence the vast underperformance of that 6-month period cannot be justified by the time of the bottom.

At this point, it is worth noting that the "Sell in May" strategy does not seem to be limited only in the US market. More specifically, a study examined the seasonal returns of 37 different markets during the period 1998-2012 and found out that the period from May to October vastly underperformed the rest of the year. While the latter enjoyed average returns 10.69%, the former returned only 0.95% on average.

While the different returns between the two 6-month periods is striking, it is also worth noting that the average performance of S&P during the bad semester has been -1.0% during the last decade. Moreover, if the dividends of S&P are taken into account, then the average return of S&P during the bad semester becomes essentially zero. While this performance is nothing to celebrate about, it is not a disastrous return. More specifically, if investors try to follow the "sell in May" strategy, they will incur twice a year commissions, the magnitude of which will depend on their broker. Moreover, if the market temporarily rises during its bad semester, investors run the risk of feeling that they are missing the train and thus they may be enticed to repurchase their shares at a higher price than they sold them.

Therefore, while the zero return of the bad semester is certainly not exciting, I believe that investors should not try to time the market and "sell in May". Instead they should remain invested in the market as long as they have chosen stocks with strong growth prospects, a reasonable debt load and a down-to-earth valuation.

To sum up, while I expected that the efficiency of the market would minimize the difference in the monthly returns of S&P, the data of the last decade proved my instinct wrong. That's why investors should always examine the real data instead of fully relying on their instinct. The real data proved that the "sell in May" strategy has merits, as the good semester has outperformed the bad semester by 6.6% on average every year in the last decade. Therefore, I cannot blame those who adjust their investment approach based on this seasonality. Nevertheless, for the reasons mentioned above, I advise investors to avoid timing the market with the "sell in May" approach and remain invested continuously as long as the fundamentals of their stocks remain solid.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.