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CNBC EXPLAINS

Sell in May, Go Away? Not so Fast

Published: Thursday, 1 May 2008 | 12:04 PM ET

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By: Ariel Nelson
Director of Market Data & Content Services

With the stock markets coming off their best month in a long time, should you take profits and follow the old adage "Sell in May, Go Away?" The answer is not so clear.

On an historical basis it is true that the average return for the Dow and S&P between November 1 and April 30 is nearly double the return for the six months between May 1 and October 31.

Dow Jones Industrial Average [.DJIA Loading... () ] since 1897:

Avg gain from May to October has been 2.5%, up two thirds of the time
Avg gain from November to April has been 4.6%, up two thirds of the time

The numbers are about the same for the S&P 500 [.DJIA Loading... () ] since 1928, at 2.5% for May-Oct and 4.4% for Nov-Apr.

However, taking a closer look there are some interesting observations that may suggest not to "go away" this year. Looking at the two thirds of the times that the respective 6-month periods had gains, the differential shrinks significantly. In those years, the average gain for the Dow over the summer is 10.3% vs. 12.0% in the Winter. The best year for May-Oct had a 38% gain vs. a 40% gain for the best Nov-Apr.

Now the kicker - For 5 of the past 6 times when the Dow lost ground between November and April, the following six months had avg gains of over 6%. Also, the average monthly Dow returns for July and August are the second and third best months of the year, following December. Even looking at the full history of the Dow since 1897 when the Dow was down over 5% from November to April, the following months between May and Oct averaged a flat return. With interest rates so low, there may not be a good place to put your money when you "go away." You may be better off saying "Always remember, sell in September"