Sell In May And Go Away: Good Advice Or Overused Cliche?

Statistically speaking, we’ve just ended the seasonally best six months of the year!

Research validates the fact that the months from the end of October through the end of April are in fact the best months of the year for investing while the six months from May through October are the “worst.”

If these were six “good” months, I can’t wait to see what six bad ones are going to look like.

The best research on this seasonal phenomenon comes from my friend, Jeffrey Hirsch, Publisher of Stock Trader’s Almanac ,where he has developed a trading indicator based on this seasonality and the historical returns it has generated.

Let’s take a look at some of “Stock Traders Almanac’s” findings:

On a historical basis, the research indicates that the market generates better rates of return from November through April than from May through October.  And the difference is significant.

Over a 60 year period, if you had invested on May 1st and closed your position at the end of October, you would have lost money.  On the other hand, if you had invested only in the “six good months” you would have made money over the same time.

Jeffrey tells us that he introduced this six month switching strategy in 1986 and going back to 1950, the results have been impressive.  $10,000 invested in 1950 during the “six good months” would have grown to half a million dollars compared to the worst six months where losses would have been roughly $6,500.

Jeffrey and have further refined and improved upon these results by overlaying a MACD buy/sell signal which generated a $1.5 million gain since 1950 during the best six months on a hypothetical $10,000 compared to the loss during the worst six months.

Now of course, there were years when this seasonal indicator didn’t work, but it does appear to offer a significant edge in risk management and investment returns.

Also, it turns out that if you invested in just the six good months of the year, you would have beaten the overall return of the major indexes while having been invested for only half the time, thereby reducing your market risk and freeing up your assets to earn interest in low risk money market or Treasury investments.

So, let’s take a look at where we are today and see if “sell in May and go away” might be in play today.

On a technical basis, a quick glance at the chart of the S&P 500 above shows a sharp turn from recent highs and a quick correction through near term support at 1340.  Current support is at around 1330 and a dip below there would indicate a swift decline to approximately 1319 where significant support is found at the 50 Day Moving Average.

On a fundamental basis, the recent sharp drop in oil, sliver and gold prices, along with spikes in the U.S. Dollar and U.S Treasuries would indicate that the “risk” trade could be weakening substantially as we enter the spring and summer months.  Adding to the argument of possible weakness ahead, we recently have seen unpleasant unemployment and earnings surprises, slowing GPD growth and plunging commodity prices.

A look at the technical and fundamental picture, along with historical seasonality, points to the possibility that, indeed, the “worst six months” might be upon us and that once more, “sell in May and go away,” could be sound advice as “April showers bring May flowers.”

Get our free newsletter