Sell In May And Go Away

Thursday, 12 March 2015

The strategy “Sell in May and go away” is an historic saying which assumes that stock market prices usually move lower from the end of April to the end of October. In consequence investors are advised to avoid stock markets investment during these months.

The origin of the statement “Sell in May and go away” originated in the City, London. In fact, the full saying is “Sell in May and go away; come back on St. Leger’s Day.” The St. Leger Stakes is the oldest of England’s five horseracing classics and is the last to be run in the year.

The rationale behind the statement is that in the Victorian and Edwardian era the major investors were what are now days termed high net worth individuals. While May and June may have been the days for enjoying “the season”, people departed for the country, the continent or Scotland. They returned to their London residences in later September or early October.

Over the years, the concept was transposed. For example it was Americanized by dropping the "St. Leger's Day" reference. This was replaced by creating a narrative that involved brokers and money managers going to the Hamptons for summer vacation and not returning until after Labour Day as its underlying rationale.

Historically, “the dog days of summer” affect financial markets in the Western Hemisphere to bring the g the weakest-performing months of the year. Stock market archives in most western jurisdictions as well as decades of historical research shows most market gains occur from November through April. , investors looking for reliable returns would find that asset allocation into equities between Nov.1 and April 30 and reallocating assets into fixed income securities for the rest of the year is the optimal solution.

So what is the truth in this maxim?

In the 21 years before the Big Bang in 1986, , there were 15 occasions when the All-Share index for the London Stock market was at a higher value in mid-September – which is when the St Leger is run – than at the beginning of May.

On many occasions the strategy has worked well in the UK. One year, 1974, the All Share index fell 41.6 per cent between May and September but the influence was the aftermath of the three-day week, when Britain was brought to the financial brink by a dispute between the government and the coal miners. By contrast pursuing the same policy the following year would have the impact of missing out on a 107.4 per cent increase in the stock market between May and mid-September 1975. In October 1986, the ‘sell in May’ policy has been just as suspect. In 14 of the 47 years since 1966 has the market been cheaper in mid-September than it was in May, in other word less than one year in three.

Historical evidence has shown that the May to October period represents a relatively weak semi-annual period for the stock market on average (but not every year), while the November to April period is a relatively strong semi-annual period for the stock market. Since 1950, the Dow Jones Industrial Average has experienced an average gain of 0.3% from May-October, compared to 7.5% during the rest of the year.

According to the Stock Traders’ Almanac, over the past 50 years the Dow Jones Industrial Average averages a gain of more than 7% between November and April, compared with less than 1% for the other six months of the year. This analysis is based on average performance. Certainly, the trend doesn’t occur every year. Since 1990, the market has generally performed poorly during the summer months and into the fourth quarter of each year according to data.

The most notable event which was a prelude to the financial crisis occurred on 9th August 2007. The banking system suffered a heart attack. On that day BNP Paribas announcing that it was ceasing activity in three hedge funds that specialised in US mortgage debt. At this moment it became clear that there were trillions of dollars worth locked into complex derivatives which were worth much less than the bankers had previously imagined. Unfortunately, no one knew the scale of the losses or how great the exposure of individual banks .Trust evaporated overnight and banks stopped doing business with each other.

On 15 September 2008 the US government allowed the investment bank Lehman Brothers to go bankrupt. Until that date, market wisdom had governments would always intervene to bail out any bank that got into serious trouble: the US had done so by finding a buyer for Bear Stearns while the UK had nationalised Northern Rock.

The period 1950-2012, the June-September period performs far worse than the generally strong market months such as December. The average June for example, has had 32 positive months and 31 “negative months” versus the average December, which has had 48 “positive months” and 15 “negative months.” The average September has had 28 positive months up and 35 negative months.

So, what is the conclusion to the range of statistics and example since the 1950’s?

On the surface, some grudging respect has to be given to the “sell in May” rule. It seems robust perhaps more robust than it really is. The rule is really a questionable observation probably no more than the result of analysis of random statistics. There are myths and on the random theory but that is for another time.

This article is part of Robert McDowall's series on Folklore & Finance.