It’s May, so get out of here

The old investment adage “sell in May and go away” still makes a lot of sense.

A look at the performance of the Dow Jones Industrial Average over the 59-year period through 2009 shows it produced an average gain of 0.4% during the six-month periods from May to October, according to the 2010 Stock Trader’s Almanac.

Over the same 59 years, the Dow averaged a 7.4% gain during the six-month periods from November through April.

To put it another way, $10,000 invested in the Dow during each of the May-through-October periods beginning in 1950 would have generated a cumulative total loss of $474, but $10,000 invested in the index only during the November-through-April periods would have generated a return of $534,348.

“One of the most remarkable seasonal patterns in the stock market is flashing a big “sell’ signal,” said Jeff Hirsch, editor the Stock Trader’s Almanac.

The rational for the seasonal market slump has been that May represents the start of vacation season, and the reduced trading activity tends to pull down or hold down the markets. Analysts such as Mr. Hirsch, however, are less interested in why it happens than in the fact that it is a predictable tool for investing.

“The market may rally a bit further over the next several days or weeks, before any significant pullback occurs, so I would advise investors to use any strength to set up bearish or defensive positions for the coming worst six months.”

Following the pattern in 2008 would have helped investors avoid a 27.3% drop in the Dow. Of course, the index still lost 12.4% during the following November-to-April stretch.

But getting out in May last year meant missing out on an 18.9% gain, while the following six months produced only a 15.4% gain.