Sell in May, Go Away, Fact or Fiction
With April in the scrapbook, we have entered into the seasonally weak 6-month period of the year.
And the debate over the Wall Street axiom “Sell In May And Go Away,” starts again.
The data shows that the markets often get choppy over the Summer months
Analysts Greg Morris notes: “If you believe something that you learned from your parents, or teachers, when you were young and have never questioned; how many things about investing and finance do you believe today but have never questioned?”
In most instances, the analysis of “Sell In May” typically uses too short of a frame looking back only to the beginning of the last secular “Bull market” that begin in the early 1980’s.
Even Nautilus’ analysis above only looks back at the last 20-years. In order to properly analyze the historical tendencies of the markets, particularly given the impact of central bank interventions in recent years, we need a more extensive data set.
Let’s use the monthly data provided by Dr. Robert Shiller to look at the seasonally strong versus weak periods of the year going back to 1900.
The table below, which provides the basis for the rest of this piece, is the monthly return data from 1900 to now.
With the above data as the basis let’s see what we might expect for this month of May
Historically, May is the 4th worst performing month for stocks with an average return of just 0.26%. However, it is the 3rd worst performing month on a median return basis of just 0.49%.
Note: Notice in the table above and chart below, average returns are heavily skewed by outlier events. For example, while October is considered the “worst month” with an average return of -0.32%, the median return is actually a positive 0.39% which makes it just the 2nd worst performing month of the year beating out February, the worst.
May represents the beginning of the seasonally weak Summer period for stocks.
As the markets roll into the early Summer months, May and June tend to be some of weakest months of the year along with September.
This is where the old adage of “Sell In May” comes from.
Of course, while not every Summer period has been soft, history does show that being invested during Summer months is a “hit or miss” at best.
Like October, May’s monthly average is skewed higher by 32.5% spike in Y 1933. But, in more recent years returns have been primarily contained, with only a couple of exceptions, within a +/- 5% return band as shown below.
The chart below depicts the number of positive and negative returns for the market by month. With a ratio of 54 losers to 62 winners, there is a 46% chance that May will produce a negative return.
The Big Q: Based on the historical data it might seem prudent to exit the markets, yes?
The Big A: Not so fast.
The problem with statistical analysis is that it measure the historical odds of an event occurring in the near future, it does not mean that it cannot/will not happen.
Such action, should it occur, will continue to support Bullishness for stocks in here. As with earnings season in full swing, there is a very likely probability that stocks can sustain their bullish bias for now.
The Bullish trend on both daily and weeklies is still intact. So, portfolio stock allocations are on the long side now.
There is, however, always the risk of a pullback that leads to a correction, and that sometimes happens when least expected and then feeds on itself.
The chart below, from Greg Morris’ recent investor summit presentation, shows the comparison of $100 invested in the S&P 500 Index (log scale) and the return when adjusted for missing the 10 best and worst days.
As Mr. Morris notes in his presentation, the markets are only making new highs roughly 4% of the time. Spending a lot of a Bull market cycle making up previous losses is not a successful investment strategy.
Successful investors work to compound investment over time, the risk is not missing the Northside action but not capturing the Southside action.
The destruction of investment capital is more damaging to long-term investment goals than simply missing a potential for rather limited gains in the late stage of a Bull market cycle.
The chart below shows the gain of $10,000 invested since Y 1957 in the S&P 500 index during the seasonally strong period, November through April, as opposed to the seasonally weak period, May through October.
It is clear that there is little advantage to be gained by being aggressively allocated during the Summer months.
Money managers note that in reality, there are few that can maintain the discipline of investing only during seasonally strong frames consistently.
Also, frames of when to start and when capital is needed make big differences in performance.
So, while the data is interesting, it yields little.
No one can anticipate with certainty what the returns will be from one day to the other.
What is known, is that prices will take a turn for the worse some day, and history shows that there will be little to no warning that something changed.
When the trend reverses, it will initially be met with denial, followed by hope, and ultimately acknowledgment later.
In the chart below, there is an indication of and intermediate-term sell signal and overbought with a secondary sell signal coming.
Both are happening at very high marks suggesting the this rally may be used for portfolio re-positioning and re-balancing by managed money.
That does not mean the market as the Bull market trend is finished. What it does mean is to manage the risk. And know that the cash raised from re-balancing will be on the sidelines until a better risk/reward opportunity presents itself to the big money.
So, at these lofty heights it makes sense to Key on to what could go wrong. Because by understanding the market impact when something goes wrong is very more important.
When the market rises, it is terrific.
But for most civilian participants when markets decline that they get the risk that they take. Never forget there will always be a trade, aka opportunity. But, disregarding risk will lead to the destruction of the most precious assets that all participants have: time and money.
So, when the financial media say ignore history that “this time may be different” tune out the Noise.
|HeffX-LTN Analysis for SPY:||Overall||Short||Intermediate||Long|
|Bullish (0.25)||Bullish (0.33)||Neutral (0.19)||Bullish (0.25)|
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