Sell In May? Please Go Away!

Starting from childhood, most people have a real, enduring fondness for simple rhymes. They stick in our heads for years and years — who among us couldn’t sing just about any nursery rhyme we learned in kindergarten?

Unfortunately, our love of catchy rhymes makes us vulnerable to bad advice from those who would use them to persuade us.

“Sell in May and Go Away” is something you start to hear every springtime, particularly if you happen to tune into the financial talking heads holding forth on TV.

Is there anything to this adage? Is “sell in May and go away” a viable strategy? Or is it yet another way Wall Street brokers try to get you to generate unnecessary commissions?

In this article, we’ll explain why “sell in May and go away” is bad advice … and what you should do, instead.

Sell In May…When?

Let’s say that you sell in May. When do you pull the trigger? Before Memorial Day? On May 1? If you “go away” in May, when do you come back?

“Sell in May, then go away” connotes a short-term, market timing advantage to being out of the market for some time, then moving back in. Many of the Wall Street pros who peddle this advice like to point out that trading volume tends to be thinner during the summer than at other times of the year. Thin volume can exaggerate price movements. If markets experience a negative shock, light trading can make it worse (alternatively, of course, it could take a positive uptrend even higher).

Let’s say that “sell in May, go away” means to take off the summer, and come back in after Labor Day. How would that work as a strategy? Numbers speak louder than TV talking points, so let’s see what the numbers say.

Statistically Meaningless

In a normal year there are 69 trading days between the Friday before Memorial Day and the Friday before Labor Day. So one way to test the viability of “sell in May” would be to look at the average return for this specific 69 day period over a number of years, and compare that 69 day period to every other 69 day period in that same range of years.

Turns out, that is pretty easy to test. From 1990 to 2014 (year to date) we have 24 data points; i.e. 24 price returns covering the 69 days from Memorial Day to Labor Day. For that same time period we have a total of 6,130 overall rolling 69 day periods. That’s our data set.

First, we calculate the average return for the 24 Memorial-to-Labor periods. Turns out that, on average, the S&P 500 experienced a price return of -0.3% from Memorial Day to Labor Day during the time from 1990 to the present. How does that compare to the average of all 69 day returns for this time period?

The average of all 69 day returns from 1990 to now is 2.2%.

“Aha!” say the Wall Street brokers. “See – there is an advantage to selling in May and going away!”

Not so fast. The average overall 69 day return is 2.2%. But the standard deviation for that return is 8%. Which simply means that, 68% of the time, the 69 day return fell between 10.2% and -5.8%. Which, in turn, means that there is no statistical significance to -0.3%, the average of the Memorial Day to Labor Day returns, compared to the average overall return.

No Free Lunches

Long story short: there is no real advantage to selling in May and going away.

But there are costs that make selling in May and going away a singularly bad idea. When you execute those trades you are generating commissions. Those commissions are good for your broker, but bad for you. Commissions over time can really eat into your effective returns.

And if you get into the habit of market timing strategies like “sell in May”, you’re probably going to wind up booking a short term capital gain at some point. There’s more money out of your effective return and into someone else’s pocket – in this case Uncle Sam.

Remember that if an investment idea sounds too good to be true, it probably is. Publicly traded stocks afford scant opportunity for profiting on market timing anomalies. If there’s money on the table, you can rest assured it will be arbitraged away before you can act on it.

Stay In May

The best thing to do in May is to stay the course – stick to a disciplined asset allocation strategy with a clear path towards your financial goal. Let an online portfolio management service like Jemstep help you make the right decisions for your specific objectives, risk considerations and tax situation.

“Plan strategically for the long term” may not rhyme, but it is better advice than “sell in May and go away.”