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"Sell In May And Go Away!"

After reading this week's Barron's I saw an interesting chart that showed the growth of $100 if the "sell in May" strategy, also known as the Halloween indicator (original research paper), were followed. Surprisingly, if you had followed a strategy of investing $100 in the S&P 500 since 04/30/45 during the period of October-April versus May-September, your $100 would have grown into $9329 in the former period versus $99 in the latter:

One would think, after seeing this chart, that selling in May, or maybe even April to get ahead of the curve, would be a prudent investment strategy. However, if you extend the timeline you get a picture that looks like this (this chart uses May-Oct. and Nov.-April, however, it is more representative due to the fact that the months are split 50/50, as opposed to 58/42 in the above chart):

Clearly, if you had ignored the period from May-September you would have missed out on some nice gains during this time frame. However, you may have noticed that November-April still outperformed. So what's the difference due to? Let's look at the average returns by month since 1925 for the S&P 500:

It seems one of the major culprits is September. So why not sell in September?

Well, as Ken Fisher points out in his book "Debunkery," the two worst Septembers (which are in the May-October period) were down 29.6% in 1931 and 13.8% in 1937, due to the Great Depression. All other months, on average, offered gains over the long haul.

Let's see what else accounts for lower gains in the May-October period:

  • Panic of 1901: May 17, 1901
  • Panic of 1907: October 1907
  • Black Monday: October 19, 1987
  • Friday the 13th mini-crash: October 13, 1989
  • Economic crisis in Asian: 1997 mini-crash: October 27, 1997
  • September 11th attacks: September 11, 2001
  • Internet bubble bursts: October 9, 2002
  • Global Financial Crisis starts: September 16, 2008
  • 2010 Flash Crash: May 6, 2010

To name a few…

In the future, who is to say the next big stock market crashes won't fall in July, the best performing month on average for the S&P 500? However, it's going to be a lot more difficult for people to create a catchy rhyme using "July."

Bottom line: Don't rely too much on statistical anomalies and try to "time the market" or you might be left holding the bag.

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