SELL IN MAY AND GO AWAY – Does It Really Work?
Sell In May And Go Away is an investment strategy that suggests the months of November through the end of April are the best performing months. Investors should sell their holding at the end of April and go to cash until the next November.
Does this really work? Are markets cyclical in nature and can be timed? In Academic circles they reject this idea because it violates the efficient-market hypothesis (EMH). Others believe the market is random and can not be timed such as this strategy suggests.
I’m so glad you have come here because I’m going to examine this trading strategy and let the facts speak for themselves.
I’m using the last 30 years. During this period the markets had some historical rallies and well as historical market crashes. A 30 year time frame should also answer any consistency concerns you may have about the “Sell In May Then Go Away”.
THE BAD MONTHS – May thru October
The first chart I am sharing is the gains/losses of the S&P 500 index from the beginning of May to the end of October over the last 30 years. As per the strategy, if you were to sell at the end of April, go to cash, and buy back in at the end of October, these are the gains/losses you would have missed out on:
|# of Winning Years:||22|
|# of Losing Years:||10|
|Avg 6-Month Gain Per Year:||+1.79%|
With 66% winning years, the S&P 500 was only able to produce an average gain of 1.79% during the bad six months of the year. Annualized gain would be 3.58% a year. Sell In May And Go Away is correct. Those are some bad months. There are a lot of better opportunities that return more than 3.6% annually.
What makes this number worse, all the gains came from 1993 to 1997. Remove these 5 years and the S&P has a negative return for the other 26 years.
If you are investing in Mutual Funds (which typically do worse than the S&P), you have done even worse, making this a no brainer. You are correct to SELL IN MAY AND THEN GO AWAY (unless of course you have no where else to invest that pays more).
THE GOOD MONTHS – November thru April
Now in the next chart you will find the gains/losses of the S&P 500 from the beginning of November to April. This is the time you are supposed to be in stocks, according to the Sell In May And Go Away trading rules.
|# of Winning Years:||25|
|# of Losing Years:||6|
|Avg 6-Month Gain Per Year:||+6.55%|
As you can see, the S&P 500 returns 4x better in the months of November through April than it does in the bad months of May through October.
More importantly, risk has gone way down. There are only 3 years with a big loss and the losses were in the range of 9% to 12% compared to 8% to 30% during the bad months.
These 30+ years of results prove that markets are not random and that they are cyclical and can be timed.
If you are invested in Mutual Funds, which typically under perform the S&P 500, that 1.77% gain in the S&P during bad months will quickly vanish leaving you with a loss. You may want to go verify this by checking the returns of your mutual funds during the bad months of the market. For a good evaluation examine a minimum of 10 years.
Taking your money out in the bad months and investing it in something that returns more than 3% annually would be a smarter option.
During the months of November thru April the S&P 500, on average, does 4x better than the bad months of May thru October.
Using this knowledge you can gain an extra edge by investing heavily in these months and lighten up or stop trading altogether in the bad months.
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