“Sell in May and Go Away” has worked over the past 3 years

Sell in May and go away 04.02.2013Enlarge GraphClichés are clichés because generally there is some truth to them. In the world of investing, the saying, “Sell in May and Go Away,” is the strategy that suggests investors lock in stock profits in May and go away until after the summer when news flow and corporate catalysts pick up again. While this strategy has not worked every year historically, over the past 3 years this would have locked in decent profits for investors.

The problem with trying to identify seasonal patterns in the stock market is that every year is a bit different and stocks should be discounting slightly different factors at any point in time making historical patterns less relevant. However, the adage of selling stocks in May and sitting out the summer has actually been a profitable strategy over the past 3 years. The rationale incorporates the idea that most of the gains over the past few years have been front end loaded partly because of the January effect, which is a rebound in stocks after tax loss selling season in December.

In our study we looked at the 1 month, 2 month, 3 month, and 4 month running returns from May 1st onward in the years of 2010, 2011, and 2012. This essentially enumerates the losses that investors would have avoided by selling stocks on May 1st of those years. So, for example, in 2010 if you sold your stock portfolio on May 1st you avoided a 12% index decline by June 1 (or the 1 month observation in our chart for 2010). Positive numbers in our study represent a profit from having locked in May prices compared to stock values 1,2,3, and 4 months later (so the periods of May 1 to June 1; May 1 to July 1; May 1 to August 1; and May 1 to September 1 in the respective years of 2010, 2011, and 2012). Of the 12 periods in this study, only the four month period in 2012 didn’t produce a positive return using this strategy as stock prices had rebounded to May levels that year.

With the S&P 500 having already put up a 10% return in 1Q13 and geopolitical trouble brewing between North and South Korea, along with Europe smoldering with another banking crisis, the stock market could be headed for a soft patch this Spring. In addition, we highlight our recent research, which shows a noticeable divergence between the stock market and the important industrial metal copper (see our work on diverging copper prices) which could be a sign of weakness for stocks. We also highlight our research that money market funds, or the available additional capital that could come into the stock market if conditions improve, has now reached more normalized levels (see our research on money market levels), lowering the chance that there will be strong continued equity flows into the market.

If Spring patterns of the last 3 years play out again in 2013, broad based stock ETFs would also decline in value.  These funds include the iShares Russell 3000 Stock Index exchange traded fund (IWV), Vanguard Total Stock Market exchange traded fund (VTI), and the iShares Core S&P 500 exchange traded fund (IVV).