The old investment adage “selling in May and going away” still makes a lot of sense, according to an analysis of market history.
The old investment adage “selling in May and going away” still makes a lot of sense, according to an analysis of market history.
A look at the performance of the Dow Jones Industrial Average over the 59-year period through 2009 shows that the index 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 total 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 general 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.
But analysts such as Mr. Hirsch 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.
Getting out in May last year would have meant missing out on an 18.9% gain, while the following six months produced only a 15.4% gain.
While the research proves an advantage over the long term of strictly following the trading strategy, Mr. Hirsch admits that it is always best to take into consideration the overall market and macroeconomic environment.
“You also want to consider what the market has done recently. For example, the Dow is coming off a really good run, and there are all kinds of technical and geopolitical issues to consider,” he said.
For example, the upcoming midterm elections represent another data point to factor in, he said.
According to the almanac, there have been 14 bear markets since 1961, and during those bear markets, the Dow has hit nine of its low points during midterm-election years.
“A little caution would be prudent right now,” Mr. Hirsch said. “It might be a good time to tighten some stop orders and put some limits on new long positions.”
