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Sell in May and Go Away: Fact or Fiction?

|Includes: EnergySolutions, Inc. (ES-OLD), SPY — Today was the first trading day of the month of May.  Sell in May and go away?  Well, that trade would have worked last year, but last May was during an extremely volatile time.  What do the historical stats say?  Out of the 18 months of May since 1993, there have been just 6 times when the monthly returns for May was negative, so a 1/3 probability that the S&P futures will be trading lower than 1359.75 at the end of the month.  Note that of the 6 negative returns we’ve seen in May, the return for one of the months was merely down 59bps.

I am using SPY data that goes back to 1993.  I will carry out a “what if” analysis based on these historical stats.  The average May return has been up about 1.7% (I am using the median figure).  If we do close the month with that average return, the ES will be at around 1383.  Now what could occur from now until that point at the end of the month?  To attempt to gain further color to that question, I examined the range (high to low) during each May.  Taking out last year’s 15.6% high to low move as an outlier, since 2010 around this time of the year was volatile to say the least, the average high to low move was 6.1% (measured as percentage of the low off the high of the month).  Continuing to assume an up 1.7% month, that 6.1% average range suggests that the ES could pull back to around 1303.  This wide a range on the ES could be a reason for the sell in May expression.  My “what if” scenarios is summarized in the table below:

What If Scenario    
Scenario SPY ES
Up 1.7% on Month 138.75 1382.87
Up 1.7% on Month, 6.1% range 130.77 1303.36
The next step of this study for me would be to examine the average high to low range for the other months of the year to verify whether the average 6.1% move for May is considered wide. 

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