By Ryan Derks
Every year about this time, people are looking towards summer break. However, the summer break I’m writing about here is a break from the stock market. “Sell in May and go away” is a seasonal strategy for investing in the stock market. Unlike most strategies that depend on either, 1) fundamental strength or 2) technical indicators, this seasonality strategy is based purely on statistics. There is very little grey area for love among the investment community for the seasonality strategy.
What is it and how does it work? Investopedia.com says, “Seasonality is a well-known trading proverb that warns investors to sell their stock holdings in May to avoid a summer seasonal decline. The “sell in May and go away” holding period is from November to May and gets back into the market in November, thereby avoiding the May-October period.”
Quick history lesson: Born in London’s financial district, the original saying is “Sell in May and go away; come back on St. Leger’s Day.” Many traders would sell their holdings in May time and go to enjoy their summer. Then, towards the end of summer, the St. Leger’s horse race took place. Trader’s would use this event to signal that summer was over and it was time to get back to trading.
Think about this: since 1950, from Nov. 1 to May 1, the Dow Jones has not had a loss in 54 years out of 64 years. That’s an 86% success rate.
A closer look at the ingredients. There are quite a few big events happening between those months:
• Halloween, Thanksgiving, Christmas, New Years, Valentine’s Day, St. Patrick’s Day, Easter, and Mother’s Day.
• Black Friday and Cyber Monday.
• Back-to-school spending.
• Employers making contributions to employee retirement plans.
• Year-end bonuses.
• Tax refunds.
So yes, a lot of money is moving in the economy between November and May. Just the first three listed make up nearly 40 percent of annual consumer spending. November and December is the biggest time of year for retailers. These two months can account for as much as 40 percent of a retailer’s annual sales.
Between holiday spending, business finance trends and tax refunds, a great deal of money moves in the economy from November to May.
The overlooked importance of percentages. Remember back to when you were in school. If you get all A’s and B’s on every test, you have a very good chance to finish the class with an A. But if you get just one D on an exam, the odds are against you finishing the class with an A. The same principles apply to seasonality and investing in general.
No, it won’t outperform the market every year. That is a fool’s errand. This strategy really excels in consistent gains and consistent avoidance of loss and volatility. For instance, think back to the stock market crash in 2008. It wasn’t until the end of 2012 where the average investor finally broke even. Nearly four years! Seasonality took only two years.
Like anything, ‘Sell in May and go away’ has it’s critics. Yes, it’s no secret that the majority of times when Seasonality or ‘Sell in May and go away’ is written about it will usually end in some manner of dismissing the whole thing because it seems too easy. So what do the critics have to say? Well a lot, actually.
• The amount of short-term gains is lost to taxes.
• The strategy is based on averages, so extreme swings high or low will throw investors off.
• It’s pure randomness, and no one knows precisely when to start.
• Central Bank investment in an economy will throw off expected results.
• Being out of the market for six months could miss big upswings.
All true enough. But there is no 100 percent solution for making consistent returns in the stock market. Remember: Past performance is no guarantee of future results. But as was mentioned earlier, a strategy with an 86 percent success rate since 1950 looks pretty attractive. The results are the one thing that no matter how much time you spent in academia, or how many years you’ve been trading, or how many letters you have behind your name, will still do all the arguing for you.
For additional information and legal disclaimers, please see legal disclaimers at http://ravennacapital.com/sell-in-may/
Ryan Derks is the non-profit accounts manager at Ravenna Capital in Independence, Mo.