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Breaking Down "Sell in May & Go Away"

Sell in May and go away is a well-known trading adage that warns investors to sell their stock holdings in May to avoid a seasonal decline in equity markets. The "sell in May and go away" strategy is that an investor who sells his or her stock holdings in May and gets back into the equity market in November - thereby avoiding the typically volatile May-October period - would be much better off than an investor who stays in equities throughout the year.

This strategy is based on the historical underperformance of stocks in the six-month period commencing in May and ending in October, compared to the six-month period from November to April. According to the Stock Trader's Almanac, since 1950, the Dow Jones Industrial Average has had an average return of only 0.3% during the May-October period, compared with an average gain of 7.5% during the November-April period.

While the exact reasons for this seasonal trading pattern are not known, lower trading volumes due to the summer vacation months and increased investment flows during the winter months are cited as contributory reasons for the discrepancy in performance during the May-October and November-April periods, respectively.

University of Miami professors Sandro Andrade and Vidhi Chhaochharia, reported in a 2012 paper that stock returns were 10 percent higher in the November-to-April half of the year than in the May-to-October period. Importantly, this result isn't solely based on historical American stock returns. Rather, they examined returns across 37 markets within a 14-year time period. In each of those 37 markets, returns in the May-to-October period were found to be smaller than those in the November-to-April period. The sample size here is relatively small, but by pooling the data, the authors were able to show statistical significance.

"This out-of-sample persistence indicates that the effect is enduring and not a statistical fluke," the authors conclude.

The question of why this effect actually persists remains unanswered.

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