Sell in May and go away: fact or fallacy?

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Where is the stock market heading? Has the rally that started in early March been exhausted? These are the key questions on all investors’ minds as financial markets remain caught between the frantic actions of central banks to get the cogs of the credit system and economy turning again on the one hand, and a still shaky economic and corporate outlook on the other.

It is therefore no wonder that even so-called “pop analysis”, including some legendary axioms, is resorted to in a quest for direction. And besides “buy low and sell high” few other axioms are more widely propagated than “sell in May and go away”. A Google search revealed an astounding 127,000 items featuring this phrase.

As equities have seen a particularly strong six-week rally, followed by what looks like the start of a consolidation/retracement of some of the recent gains, investors are justifiably questioning the market’s next move. And they nervously wonder whether this May will not only herald longer days in the Northern Hemisphere, but also live up to its reputation as the advent of a corrective phase in the markets.

The important issue, however, is whether this axiom actually has any scientific basis at all. Analyzing historical returns, the figures vary from market to market, but long-term statistics seem to show that the best time to be invested in equities is the six months from early November through to the end of April of the next year (“good” periods), while the “bad” periods normally occur over the six months from May to October.

A study of the MSCI World Index, a commonly used benchmark for global equity markets, reveals that since 1969 “good” periods returned +6.5% per annum while investors were actually in the red by -1.0% per annum during the “bad” periods.

“Sell in May and go away” also holds true for the US stock markets. An updated study by Plexus Asset Management of the S&P 500 Index shows that the returns of the “good” six-month periods from January 1950 to March 2009 were 7.9% per annum whereas those of the “bad” periods were 2.5% per annum.

A study of the pattern in monthly returns reveals that the “bad” periods of the S&P 500 Index are quite distinct, with five of the six months from May to October having lower average monthly returns than the six months of the good periods. Interestingly, May – the first month of the bad patch – is the only exception.


Historical average returns from May to October in emerging markets also tended to be weaker than those from November to April, as shown in the graph below (hat tip: US Global Funds).


But what exactly does this mean for the investor who contemplates timing the market by selling in May and reinvesting in November? Further analysis shows that had one kept the investment in the S&P 500 Index only during the “good” six-month periods, and reinvested the proceeds in the money market during the “bad” six-month periods, the total return would have been 10.5% per annum.

These calculations do not take tax into account. And, of course, every time one switches out of and back into the stock market there are costs involved, which would also reduce the returns for the market timer.

How did the good and bad periods stack up during the past two years? The results are as follows.

• May 2007 – October 2007: +4.52%
• November 2007 – April 2008: -9.62%
• May 2008 – October 2008: -30.1%
• November 2008 – April 2009: -5.1%

Some you win, some you don’t! It seems that the axiom “sell in May and go away” in itself is a rather doubtful basis for timing equity investments. However, it may serve a useful purpose as input, together with other factors, to otherwise rational decision making.


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6 comments to Sell in May and go away: fact or fallacy?

  • Guy Lerner


    This is very well said on your part:

    “Some you win, some you don’t! It seems that the axiom “sell in May and go away” in itself is a rather doubtful basis for timing equity investments. However, it may serve a useful purpose as input, together with other factors, to otherwise rational decision making.”

    Probably can throw 95% of market analysis into that statement!

  • I’m probably not breaking any ground here, Prieur, but Ned Davis shows the results of the results of two hypothetical investment strategies. The first is $10,000 invested just from May 1 – October 31; the second, from Nov. 1 – April 30. Starting in 1950, the first strategy produces a net gain of $4,002; the second, $372,890. I’ll pay taxes on that any day.

    Using the same strategies but with the dates of May 1 – Sept. 30 and Oct. 1 – April 30, instead, the results are even more staggering. Strategy 1 produces a gain of $2,684; the second $594,517.

  • David Wallace

    A lot of studies only look at the aggregate over time as support for the trading rule. It is important to look at the equity curve as well
    to see if the rule has stopped working.

    Here is a table for the Profunds Ultra Bull fund (2x SP500): Jan 1998, Feb 2009.

    Period Oct-Apr May-Sep
    1998 62.7% -17.3%
    1999 40.9% -8.8%
    2000 -19.9% -4.0%
    2001 10.0% -37.2%
    2002 3.9% -52.6%
    2003 32.1% 17.7%
    2004 16.7% 1.9%
    2005 -6.9% 11.6%
    2006 20.3% 3.0%
    2007 -1.6% 5.6%
    2008 -49.1% -23.5%
    2009 -53.3% 0.0%
    Total 55.6% -103.6%

    Aggregate says be long Oct-Apr, be short May-Sep.
    BUT not during bear markets.

    Did this rule stop working in 2003?

    Post 2000 bear, the May-Sep short was very rich.
    A period similar to that one is coming up.

    BUT who wants to be short with all that stimulus $ hitting and with all the trillions in low-yield money market accounts waiting to come back, not me.

    So how do we really use this rule?

  • The market calendar is just a piece of the puzzle. As a trader I take the axioms for what they are worth axiom + axiom = axiom and if the axiom matches the charts then the higher the probability for a successful trade (short or long).

  • […] also see my recent posts “Video-o-rama: Investors “look past the valley“, “Sell in May and go away: Fact or fallacy?” and “Donald Coxe – Investment recommendations (April 2009)” (And also make a […]

  • It starting to look like the statistics will prove right in 2010. Thanks for the international charts. Here I thought it was just in the US where the markets take a nice vacation during the summer months.

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