Market Seasonality

Should you sell in May and go away?

We often hear the expression,”Sell in May, and go away.”, but why is this adage so popular and what do the numbers tell us about its worthiness. Yale Hirsch, the publisher of Stock Trader’s Almanac, has done intensive studies on market seasonality. He has found many periods throughout each year where market strength and market weakness occurs much more frequently than a random model would suggest. One of the better known seasonal patterns is that the market performs much better during the period from November through April than the period from May through October. This does not discount that there can be strong periods between May 1st and October 30th. In fact, the 2009 return of the Dow Jones Industrial Average (DJIA) for this period was 18.9%. If you had sold on May 1st of 2009, you would have missed some juicy gains. But, if we go back to 2008, the May through October period resulted in 27.3% decline for the DJIA. Overall for the two year period you end up with a net 13% loss. Over the long run a sell in May and go away strategy has put up some pretty impressive results. Yale Hirsch performed a study going back to 1950. Hirsch looked at the return generated by an initial $10,000 investment during each period, May 1st through October 31st or Nov 1st through Aril 30th. If you look at the table below you will see that the $10,000 invested in the November through April period returned $464,736 or an average annual return of 6.75%. The $10,000 invested only in the period from May 1st to October 31st returned a loss of ($1991), or an annualized return of -0.37%.

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Although this strategy is very unpractical for most investor situations, there are several ways to use this knowledge in portfolio strategy. If you have achieved some strong gains in the November to April period it may be a good time to book some profits as we head into May. For those who contribute to an investment plan on a monthly basis, it may pay to hold off purchases until the September and October months which are toward the end of the weak period. These months are also considered two of the weakest months of the year. Purchases made in September and October could be made at cheaper levels than earlier in the weak period. For those who trade options, the weak period of May through October could be a good time to write calls against your positions. This will provide you with some additional income and some downside protection.