We’ve heard the market adage: “Sell in May and Go Away!” but does it really work? Historically, the market has performed better from the October – May period than it has from May to October, but I wanted to show you the last few years starting with 2002 and conduct visual inspection of this strategy.
Success is based on Index price being higher in May than in October.
Let’s start in 2002: – YES, the strategy worked perfectly
2003: NO, the strategy failed
2004: YES, the strategy worked (though not perfectly)
2005: NO, the strategy failed
2006: NO. However, May registered the annual high before falling 8%, but the bottom occurred in July, not October.
2007: NO – However, The high (before October) occurred in July, keeping you out of the mid-year decline, but you would have lost money buying in October.
Based on this lookback to 2002, prices were higher in May and lower in October 2 out of 6 years.
Interestingly enough, if we change October to September, then the strategy worked 4 out of 6 years.
In every year observed except 2003 and 2005, there was some sort of turbulent move to the downside during the summer months, and selling in May would have prevented this downside move in the Index.
This is an unscientific observation, and is mainly created to inspect visual performance of the S&P 500 index over these years with a special emphasis on the time period between May and October.
Whether or not ’selling in May, 2008′ will be beneficial is yet to be seen, but we’ve already had a large volatility move to the downside earlier this year and we could still have more should the economy continue to slide.
Nevertheless, the tendency for the market to perform poorer during the summer is interesting to review and does have historical precedent (see CNN Money article “Sell in May and Go Away” and many other sources).
According to the article, “Over the past 50 years, from the end of October to the end of May the S&P 500 index has gained a cumulative 2,806 percent (7% per year)…. Now, what would happen if you bought in May and sold at the end of October? The S&P 500’s cumulative gain over that period for the past 50 years is 24 percent (0.4% per year).“