Posted by: Ben Steverman on April 27, 2010
Some stock traders live by the maxim, “Sell in May and go away.” As the calendar ticks toward May Day, should we be getting ready to sell?
Historically, the worst six months for the stock market are the stretch from May to October. According to the Stock Trader’s Almanac, from 1950 to 2008, the Dow Jones industrial average rose an average of 0.1% in the May-October time period, versus an average of 7.3% from November through April.
This definitely did not work last year. In 2009, the Dow gained 18.3% from May through September.
Last year the stock market’s natural tendencies were masked by the recession and recovery, says Stock Trader’s Almanac editor-in-chief Jeffrey Hirsch. But this year, he warns, could be a return to the market’s usual seasonal ebb-and-flow.
The Almanac calls this “an eye-popping strategy.” Indeed, it would have netted great returns in the past 60 years. One reason the strategy would have been so successful is because market crashes or corrections have tended to occur in September or October, including in 1929, 1974, 1987, 2001, 2002 and 2008.
But there are some practical problems with selling in May and going away. First, there is no guarantee that the trends of the last 60 years will continue in the next 60. It’s possible the stock market’s supposed “seasonality” is just us finding patterns in random events.
Another problem with “sell in May and go away”: Go where? If you move your holdings into cash, you miss out on any May-to-October gains, which have occurred for 12 of the last 20 years.
There might be good reasons to lighten up exposure to stocks right now, but I don’t think the calendar is one of them.