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.

According to Dr Prieur du Plessis, Plexus Group chairman, 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,” says du Plessis.

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. According to du Plessis, an analysis of historical returns reveals that 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. Historical average returns from May to October in emerging markets also tended to be weaker than those from November to April (see accompanying Graph A).

Sell in May and go away” also holds true for the South African stock market. An updated study by Plexus Asset Management of the FTSE/JSE All Share Index shows that the returns of the “good” six-month periods from January 1960 to April 2009 were 11,9% per annum whereas those of the “bad” periods were 5,2% per annum. An investment of R10 000 in January 1960 in only the “good” six-month periods would have resulted in a payout of R2 519 944 at the end of April 2009, compared with a payout of only R118 553 for an investment in the “bad” six-month periods only – an astounding difference in proceeds.

A study of the pattern of monthly returns reveals that the “bad” periods of the FTSE/JSE All Share Index are quite distinct, with four of the six months from May to October having lower average monthly returns than the worst average return (November) of the “good” six-month periods. “Interestingly, May – the first month of the bad patch – is an exception, as is the month of July,” says du Plessis.

The accompanying Graph B by Plexus confirms the above and illustrates that investing in the FTSE/JSE All Share Index during the six months from November through April has accounted for the vast majority of FTSE/JSE All Share Index gains since 1960.

But what exactly does this mean for the investor who contemplates timing the market by selling in May and reinvesting in November? According to du Plessis, further analysis shows that had one kept the investment in the FTSE/JSE All Share 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 17,8% per annum. This compares with a total return of 17,7% for the investor who decided to stay invested during both the “good” and “bad” six-month periods (see accompanying Graph C).

“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,” adds du Plessis.

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

• May 2007 – October 2007: +12,5%
• November 2007 – April 2008: -0,6%
• May 2008 – October 2008: -30,7%
• November 2008 – April 2009: +0,9%

The above results show that 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,” says du Plessis.

Graph A


Graph B


Graph C


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