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 where an investor sells his stock holdings in May and gets back into the equity market in November, thereby avoiding the typically volatile May-October period.
This strategy is based on the historical under-performance of stocks in the six-month period commencing in May and ending in October, compared to the six-month period from November to April.
Origination of the Phrase “Sell in May and Go Away”
The phrase sell in May and go away is likely a take on an old English saying, “Sell in May and go away, and come on back on St. Leger’s Day.” This phrase refers to the custom of aristocrats, merchants and bankers who liked to leave the city of London and go to the country to escape the heat during the summer months. St. Leger’s Day refers to the St. Leger’s Stakes, a thoroughbred horse race in mid-September and the last leg of the British Triple Crown.
Do the Markets Drop in May?
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 between the May-October and the November-April periods, respectively.
Disadvantages of Sell It in May and Go Away
There are limitations to implementing this strategy in practice, such as added transaction costs and tax implications of the rotation in and out of equities. Another drawback is that market timing and seasonality strategies do not always work out, and the actual results may be very different from the theoretical ones.
Best to Buy-and-Hold
Using 142 years of data, analysts at Virginia-based CXO Advisory Group looked at three strategies: (1) holding stocks November-April and cash May-October (i.e., “Buy in May and Go Away”), (2) doing the opposite and (3) holding stocks year-round. While strategy (1) delivered better returns than (2), strategy (3) was by far the best overall, its superiority magnified when transaction costs were factored into the analysis, according to Forbes magazine. A similar study, based on a more recent 20 years’ worth of data, yielded the same conclusion, per Wall Street Daily.
Equity strategist Sam Stovall of S&P Global Market Intelligence has voiced his own skepticism about “Sell in May and Go Away.” Last year, noting that the S&P 500 Index (SPX) had advanced an average of 1.4% in the “summer” months since 1945, Stovall advised clients that “a 1.4% annualized return is better than one would get in cash, at least in the recent past, and the S&P 500 rose in price during this seasonally soft period 63% of the time,” as he was quoted in USA Today.