There is an old adage among investors that they should “sell in May and go away,” taking the rest of the year off. Does this strategy make sense this year?
We can and often do look back at previous market data to seek out opportunities to improve our results. There are many adages that have emerged from this, and “sell in May and go away” is one of the more famous ones.
Now that May is approaching, some investors may be wondering whether they should do this in our current climate, and some may do this every year actually, turning themselves into part-time investors who are out of the market more than they are in.
If the results were strong enough, this could perhaps have some merit, even though we should not want to take an idea like this and just apply it generally without further examination. Even if this works on balance, or rather, would have if we followed it every year up until now, unless this works each and every year, we really need to look to drill down and look to further refine this simple advice to determine whether a given instance would have the numbers behind it or not.
The first filter we need is one of weighting, where we would normally want to weigh recent results more. If, for instance, this worked for 50 years in a row and hasn’t for the last 10, each of these last 10 years are going to be more important than the previous 50, since they are more recent.
People look back as far as the 50’s for data to support this, and give each year the same weighting, which isn’t a very good way to approach this. We do need to assign degrees of relevance here and what happened in 1956 just isn’t anywhere near as relevant as what happened in recent years. The stock market has changed a lot since then, even to the point where we really shouldn’t be using data that old or anything close to it.
The problem though is that we need enough trials to arrive at a number that is more statistically significant, and if we just looked at the last 5 years for instance that wouldn’t be very significant as far as statistics go, but it still can be practically relevant and of some use.
Looking to Refine This Idea
Since this is not as simple as just looking at an array of data with equal weighting, and the time interval is bound to distort the picture, we could even argue that just a handful of years could be more significant than a much longer series like 50 or 60 years that mostly contain data of much lesser relevance to today.
There are other considerations as well, and numerous ones in fact, but we really only can focus on the important ones, because we really need a high degree of commonality. Otherwise, our sample size of each permutation may be too small, even only representing a single instance each, or no usable instances if we have conflicting categorizations.
Everyday investors aren’t going to want to do too much work either, and even though we could imagine a team studying this for a long time to arrive at a set of rules, we need to keep this as simple as we can while still striving to provide advice that is at least somewhat valid. Sell in May is perhaps as simple as we can get, and while we don’t need to just focus on one rule, the rules need to be few and they need to be simple to discern and follow.
Prior to our even having a look at some of the data, it should strike us as unusual at least that this rule could have us coming out ahead during a long bull market. If we did see a trend here, that would speak very loudly for the idea, as it this works during big bull runs, it’s likely to work in bear ones as well, when it might be wiser to just go away period when the rain comes and come back when it stops.
The lure of simplicity where individual investors are concerned really stands out when you compare these two pieces of advice, the sell in May versus the sell and go away during bear markets. We can be far more accurate by using the market as our guide and not just the calendar.
It’s not that we can’t come up with some fairly simple rules for this though, and perhaps even incorporate them, such as sell in May and go away for the current year only during bear markets.
This distinction is a pretty intuitive one, as during bear markets, going away in May or anytime is a good idea, but going away during the good times will keep a lot of them from you.
We need to ask ourselves where this idea of selling in May came from. It arose because people thought that the lighter trading volumes over the summer portends not only lesser results but negative ones on balance. Lighter volumes and even less volatility do not infer that stock prices will go down from this. This is not a matter of this being a downward influence to even a minor degree, this simply is not a downward influence at all.
This can push prices up higher though, but the potential for less of this has nothing to do with what we’re looking to determine, which is whether this is a profitable time for investors or not. If anything, lower volumes and volatility would make it less likely for a bigger sell-off during this time, and therefore may be less risky.
The Numbers Tell the Story Here
How the numbers play out here, looking at the past few years, does speak as well. We can start with last year, where the market was up, and the market did lose from May onward, even though the summer was a bullish time and go away in September or October would have been much better.
We can use the Dow for these examples, and use the end of May and the end of December as our signposts. 2018 had May side up 108 Dow points, a very small amount, although exiting at the end of September and going away would have been far better.
Going away in May 2017 would have been a big mistake though, missing out on 3,535 points. May 2016 exiting wasn’t so good either, as the market rose 1,784 points the rest of the way. 2015 had May coming in ahead by 432 points. 2014 had May fall behind by 1,141, with a similar shortfall of 1,196 in 2013. The May side dropped 266 points in 2012, gained 568 points in 2011, lost 773 points in 2010, and came up short by 2098 points in 2009. Selling in May provided a total gain of 1,108 points in the years it worked, but it lost a total of 10,793, for a net loss of 9,652.
Selling in May was the wrong choice 7 out of 10 years. The fact that the total losses with this idea outnumber the total amount gained by tenfold is the most significant part, and based upon all this, it would be quite ridiculous to portray this as a good idea.
This takes us back to the start of the bull market, and that’s what we really need to seek to understand right now, how this performs in a bull market. Selling in May or any selling recommendations during a bear market would intuitively perform well because the recommendations and the market is going in the same direction.
Selling in May during the 2007-09 crash would have been a particularly good idea, nowhere near as good as a just sell period during these times rule, but when a rule has you going against the grain by being out of the market most of the time during bull markets, this is a different story, as we see. This idea wasn’t just a little unsound, it had us simply getting crushed.
When you shake and stir the outcomes of both bull and bear markets, and look back 60 years, you might be able to show that sell in May and go away might make some sense. When we add in a little twist that only has us doing this during bear markets, markets that we generally want to be out of anyway, and not while the market is trending up, this idea just might work, and it makes sense that it would.
However, using such an adage indiscriminately and especially during bull markets is supported by neither the numbers nor common sense.