By the Numbers

Is "Sell in May" a Good Strategy?


There is an adage on Wall Street that says "Sell in May, and stay away" referring to the fact that historically, the six-month period between May 1 and Oct 31 is the worst performing 6-month period of the year.  But is that the correct way to look at things?

Based on straight averages, it might seem like sound advice.  Each of the major indices, on average and since their inception, have outperformed in the October-April time period.  The Stock Trader's Almanac suggests that an investor can amplify his/her returns using MACD (Moving Average Convergence Divergence) timing for determining whether to accelerate or postpone entries and exits.  The idea is to get in earlier in up trending markets, and to delay in down trending markets.

Sam Stovall, Chief Investment Strategist at Standard & Poor's further points out "had an investor heeded the old saying in 2008, they would have avoided the 30% decline the S&P 500 experienced from 4/30/08 through 10/31/08." 

However, Stoval continues, "Well if history is any guide – it’s never gospel – investors may be wiser to 'turn a deaf ear this year.' During or just after the 14 bear market bottoms since 1932, the S&P 500 rallied during the traditionally sleepy May through October period, registering an average 12.2% advance and rising in 12 of 14 occasions."

In the spirit of Jim Cramer's "there's always a bull market somewhere", Birinyi Associates looked at data from 1962-2008.  While the S&P was only up 49% of the time for an average of .5%, certain sectors were up more significantly.  Consumer Staples, for example, was up 68% of the time for an average gain of 2.55%.

Even if you look at straight historical averages, there are some good gains to harvest in certain months during the May through October period.  July and August are amongst the best months for the Dow while May and June have historically been good for the NASDAQ .  Rather than "Sell in May, Stay Away",  perhaps the phrase should be "Always Remember, Sell in September."

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