If you’ve been an investor for any length of time, or even if you’ve just watched financial television, you’ve probably heard someone talk about a trading strategy known as “sell in May and go away”. Essentially, this strategy suggests that you should take profits or at least increase your cash holdings sometime around the end of May, and then wait until sometime around the beginning of September to look for opportunities to buy back in. Since May has just ended, I thought this might be an interesting topic to talk about today.
Now, most historical sources would say that this strategy is an American adaptation of an old English expression “Sell in May and go away, and come back again on St. Leger’s Day”. This was based on a tradition in old England in which bankers would go on vacation out to the countryside in May, and then not come back to the city of London until mid-September.
So, the Americanized version, which is “Sell in May and go away, and come back again on Labor Day” is based on a seasonal belief that trade volumes and often market performance slow down during the summer months when schools let out and families go on vacation. But is there a valid basis for that trend and if so, is it a good strategy to employ? Well, like anything that’s often passed off as conventional wisdom, I think it’s always wise to check the data yourself.
So, I took a look. I took a look at the period of time between Memorial Day and Labor Day every year since 1950 and here’s what I found. While the S&P 500 went up in 50 out of those 67 years, even the period between Memorial Day and Labor Day was up about 45 of those years, and so that means 90% of the time when the market was having a pretty good year, it was also having a pretty good year between Memorial Day and Labor Day. So, if over a 67 year period, there were really only 5 years where if the market was doing well, it would have been smart to sell in May, it seems like there isn’t much truth to that strategy.
But, another old expression says, “there’s two sides to every coin”. So, when I dug a little bit deeper, I found that while indeed there were gains in most of those years, those gains were significantly lower. Now what I mean by that more specifically, the average yearly return over that 67 year period was about 13%, but the average return for the period between Memorial Day and Labor Day was only about 1%. So that means while the period from Memorial Day to Labor Day was not generally a losing period, it was a period of significant underperformance. And that means most of the market’s gains usually happen from September through May, and not the other way around. So perhaps this strategy has some merit after all.
Let me leave you with this. Look, no strategy, no indicator and no pattern should ever be used as a sole basis for your trading. But as one more tool in a more comprehensive trading plan, it looks like there might be more to a summer vacation, than just a lot of hot air.