Sell in May and Go Away? A look at the Dow since 2001
Many articles have been posted regarding the axiom: “Sell in May and go away,” which is in reference to studies that show that the market’s worst performance begins in May and ends in November. While performance is mixed on various years, it is helpful to study the last 5 years of market action (as evidenced by the Dow Jones) and determine whether this was an attractive strategy in recent history.
2006
2005
2004
2003
2002
2001
Results:
2006: Yes in the short term and No in the long term (would have been better to buy in June)
2005: No. Market highs were made in March and not retested until November
2004: No. Market high was made in February and exceeded in December
2003: Absolute no. Selling in May would have left enormous profits on the table.
2002: Yes. This year would have worked wonderfully to Sell in May.
2001: Yes. Perfectly. The high of the year was made in May and low was made in October.
Cursory results: 50% effective, IF that high.
It is still best to study and analyze the market daily or weekly, and not rely on old market wisdom, at least as it regards to actively trading the market. Investing is not simple – not by a long shot. The profits go to the diligent, not the lazy.
Corey,
I have done some looking at this and there are some interesting investing tidbits. I looked at SP500 data from 1950 to present and if you sold in the last week in May and bought in the last week in October you would have made almost as many SP500 points as buy and hold during the entire time. What did come out of my simple look at was the following:
Distribution of Performance (%)
May – Oct Occurrence Average Gain
Up Periods 64.9% 3.70%
Down Periods 33.3% -2.42%
Oct – May Occurrence Average Gain
Up Periods 78.9% 9.45%
Down Periods 21.1% -1.89%
Sorry for the double posts. I was trying to format the info so it was more readable and somehow got it entered twice.
In any event, I found it interesting that the “Sell in May” axiom doesn’t necessarily hold as far as actually selling, but it does look like returns during this time are somewhat less likely and the performance is more muted.
Thank you Mike for your post and data.
I agree that data show that the ‘summer doldrums’ hold that returns are move advanced from Nov – April in most years. Data do test out in this regard. There are various reasons, including vacations during the summer, April tax flows ceasing, returning to work (mentality) around October, end of year ‘window dressing,’ rebalancing in January, etc, etc, etc.
I think the best thing to do is have the overwhelming preponderance of evidence in your favor when investing, and this axiom is one of those bits of data. It is like a wind that can help you if you know seasonalities, and for traders to use leverage (possibly) or larger positions during Oct – April and go easier (or go into ‘study mode’) during the summer.
Nevertheless, the axiom is just one tool to examine, and probably best not used in a vacuum (for example, in a raging bull market).
Thank you!