Sell in May, and go away?

The old investing adage adds up … but it may not be the best strategy.

Summary: The old adage to sell out in May and come back later in the year does actually have some historical credibility based on market performance data. It shows that over the past 60 years or so, markets have not performed as well between May and October as they have between November and April.
Key take-out: Despite the data, good returns can also be made in the May to October period, and there are risks of being in a crash in any six-month period.
Key beneficiaries: General investors. Category: Portfolio management.

There is an old saying, “Sell in May and go away until St Ledgers Day” (in September). Certainly, sharemarket slumps in April-May have been a feature of each of the last four years and may be so again this year.

Jeffrey Hirsch, chief market strategist at the Magnet Æ Fund and editor-in-chief of the Stock Trader’s Almanac says the best time of the year to go long in stocks is October and the best time to go short is April. In his latest book last year he promoted such a Six Months Switching Strategy.


According to Hirsch, America’s Dow Jones Industrial Average share index has averaged the following monthly gains or losses since 1950.

Hirsch says from November to May over this long period the average increase in the Dow Jones Industrial share index was 7.5%, whereas between May and October it was only 0.3%.

Furthermore, over the last 62 years, the best six months experienced only 14 share price slumps, while the worst six months had 25 of them.

On Hirsch’s logic one should play safe by investing in shares in the “best” six months and then shift to cash during the “worst” six months. That would give a better risk adjusted return than buying and holding a portfolio of shares indefinitely.

But does a “Sell in May” and “Buy in November” strategy work in Australia?

According to Asxiq, since 1984, the best six-month period has been December to May while the worst has been May to October. See next chart. Over this 28-year period the average gain in the Australian All Ords index from December to May was 7.%, whereas from May to October it was only 1.7%.

Average returns for All Ords Index for any 6 month period since Nov 1984

The main takeaways from Asxiq’s research (http://asxiq.com/blog/sell-in-may-and-go-away-all-ords-statistics/) are:

  • Any six-month period in Australia has on average produced positive returns, though the best (December-May) was a strong 7% and the worst (June-November) was a weak 1.1%.
  • December to May proved a winner 79% of the time, whereas May to October was a winner only 57% of the time.
  • When bullish, both the best and worst six months generated about the same average gains (10%, and 10.2% respectively).
  • When bearish, the best six months produced an average loss of only 4.5%, whereas the worst six months produced an average loss of 13.1%.
  • The maximum loss for the May to October period was 29.6%, while that for all other six month periods was 41.8%.

My response to the “Sell in May and go away…” adage is that there is no logical basis for why it should persist. Yet I recognise that after 60 years it has some pedigree.

But be warned. Based on this data it’s not wise to automatically boycott the market for a six-month period, because no six-month period on average has been negative, and when any six-month period has been positive it’s done very well. On the other hand, both the best and worst six-month periods were not immune to large losses, though the former’s losses averaged only 4.5% while the latter’s averaged 13.1%.

So the lessons for a market timer might be these:

  1. There are opportunities to make money in any six-month period, so don’t automatically shun May to October.
  2. There are risks of being in a crash in any six-month period, so don’t think you are safe between December and May.
  3. Trend-trade all year so that you can ride the rallies and buck the busts for however long they last.

The following chart shows that April and May and August, September and October are prone to market setbacks in Australia, so be particularly on guard for any breaches of the All Ords index’s medium to long-term trends during these months.

MarketTiming’s Active strategy (which times the stockmarket’s medium term trend) issued a sell signal on the May 27, but its Conservative strategy (which times the long-term trend) so far remains on a Buy signal.

In a casino, the house ultimately wins because the system is rigged in its favour. Likewise market-timing based on trend-following principles is designed to give you an advantage over the herd of shareholders who enter the market too late in a rally and leave it too late in a bust.


Percy Allan is a director of MarketTiming.com.au For a free three week trial of its newsletter and trend-trading signals for listed equity and gold funds click here (www.markettiming.com.au).

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