Should I Stay Or Should I Go?

4/14/2014


"Sell in May and go away," is a popular saying revived each spring by the financial press. The adage owes its origins to London traders who would proclaim, "Sell in May and go away; don't come back till St. Leger Day," referring to a horse race held in the fall. The thinking goes that volumes plunge while investors take summer vacations, causing unusual volatility for the thinly traded shares.

At first blush the strategy seems untenable, given that traders tend to stamp out market inefficiencies. To measure this effect, we calculated six-month returns for the S&P 500 Index starting in each month of the year since the beginning of 1957.

As shown below, holding periods from May to October averaged an increase of 0.9% — the worst of any period. Just 61% of these periods produced a positive return. In comparison, buying the capitalization-weighted S&P 500 in November and selling in April generated an average return of 6.8% — the highest — and enjoyed the best winning percentage at 75%.

SELL IN MAY AND GO AWAY
The expression "Sell in May and go away" typically refers to a six-month trading strategy that sells stocks at the start of May and buys at the beginning of November. We calculated six-month returns for the S&P 500 Index starting in 1957 for 12 holding periods. From May to October, the S&P 500 averaged gains of only 0.9%. In contrast, the index rallied an average of 6.8% in the six months from November through April, with 75% of the 56 periods generating positive returns.
Six-Month Holding Period
-------------------- % Change in S&P 500 Index --------------------
Start
Finish
Average
(%)
Maximum
(%)
Minimum
(%)
Winning
Percentage
(%)
January
June
4.0
38.8
(23.5)
64.0
February
July
3.3
21.4
(19.3)
68.0
March
August
3.6
38.8
(25.0)
68.0
April
September
1.8
32.5
(32.4)
61.0
May
October
0.9
19.9
(30.1)
61.0
June
November
2.1
26.3
(36.0)
63.0
July
December
3.8
28.3
(29.4)
69.0
August
January
4.4
35.7
(34.8)
68.0
September
February
4.5
29.4
(42.7)
68.0
October
March
6.5
31.2
(31.6)
67.0
November
April
6.8
24.9
(16.6)
75.0
December
May
5.6
30.3
(18.4)
71.0

Of course, we publish a newsletter all year long, so we have a vested interest not to promote this strategy. But there are several concrete reasons not to sell in May and go away:

Costs. The strategy would rack up transaction costs, and short-term gains are taxed at a higher rate than long-term gains.

Extremes. Average returns conceal outliers that can test investors' patience with the strategy. Yes, the May-to-October periods have averaged 0.9% returns since 1957. But the index gained 10.0% in the six-month period ending October 2013 and 18.7% in the period ending October 2009. Unless you can tell in advance which years will be weak (hint: you can't), you'll often regret selling in May.

Positive returns. While May-to-October returns lagged those from other periods, the index still tended to rise. Unless you have an alternate strategy likely to outperform stocks, selling in May makes little sense.

Quadrix can supersize returns for both seasonal periods. Check out the table below. While the average S&P 500 stock averaged a total return of 1.5% during May-to-October periods since 1995, limiting the purchases to high Overall scorers boosted the return to 3.4%. That increase makes selling in May seem more foolish.

QUADRIX CAN HELP
Starting in 1995, in the 19 six-month periods from May through October, S&P 500 Index stocks averaged 1.5% total returns, versus 11.1% returns during periods from November through April. High Quadrix Overall scorers delivered superior returns in both periods.
------ Avg. 6-Month Return ------
------- Winning Percentage -------
Index
All
Stocks
(%)
Overall
Above
80
(%)
All
Stocks
(%)
Overall
Above
80
(%)
May through October
S&P 500
1.5
3.4
54
55
S&P 400
1.6
3.0
51
51
S&P 600
2.7
4.7
51
54
November through April
S&P 500
11.1
13.4
71
73
S&P 400
12.8
14.9
71
72
S&P 600
12.1
12.2
65
67

On the other hand, purchasing equal dollar amounts of all S&P 500 stocks in November and holding them through April would have generated average returns of 11.1%, or 13.4% if you stuck to high Overall scorers.

S&P 500 HEATS UP AFTER TEMPERATURES FALL
Based on average monthly returns for the S&P 500 Index, December (up 1.55%) is the best-performing month, while the worst-performing months occur in the summer, with June and September averaging negative returns. Winning percentage is based on the number of months when the return for the S&P 500 was positive.
January
February
March
April
May
June
July
August
Sept.
October
November
December
Average % change
1.02
(0.04)
1.17
1.51
0.20
(0.15)
0.61
0.08
(0.68)
0.91
1.35
1.55
Maximum (%)
13.18
7.15
9.67
9.39
9.20
5.44
8.84
11.60
8.76
16.30
10.24
11.16
Minimum (%)
(8.57)
(10.99)
(10.18)
(9.05)
(8.60)
(8.60)
(7.90)
(14.58)
(11.93)
(21.76)
(11.39)
(6.03)
Winning percent. (%)
60
53
67
70
58
51
49
58
44
61
67
75

 


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