Should investors heed the phrase “Sell in May and Go Away” this year?
If there’s one thing I’ve learned over the last 30 years or so, its that any advice that rhymes is guaranteed to be true and is automatically good to follow. Think about it:
“Beer before liquor, never sicker”
“An apple a day keeps the doctor away”
“Step on a crack, break your mother’s back”
“Liquor before beer, you’re in the clear”
You see? How could it not be true when it rhymes so perfectly like that?
OK, in all seriousness, here’s the deal with the Sell in May and Go Away thing…as stupid as it seems, it actually works more often than not, and that’s annoying for a deconstructionist market commentator like myself.
The theory here is that the 6 month period from November through the following April is better for stocks than the other 6-month half of the year, from May through October.
According to the Stock Trader’s Almanac, over the last 59 years, The Dow Jones Industrial Average did better in the November through April period 40 times. So about 2/3rd’s of the time since 1950, you may have been better off being out of the stock market from May 1st until Halloween.
Even during the last 5 tumultuous years, this maxim held true, with 4 out of 5 Nov-Apr periods outperforming their May-Oct corollaries:
Year DJIA May-Oct DJIA Nov-Apr
2008 -27.3% -12.4%
2007 6.6 -8%
2006 6.3% 8.1%
2005 2.4% 8.9%
2004 -1.9% 1.6%
New Yorkers used to think that this was because the bigshot floor traders all left in May for the Hamptons and Bostonians used to chalk this phenomenon up to the fact that the big mutual fund managers headed out for Martha’s Vineyard or Nantucket. Two problems with this reasoning…
Number one, ain’t nobody checking out and heading to the Hamptons or the Vineyard this year! With the indices trouncing most managers’ performance numbers and Wall Streeter’s fighting like never before to keep their jobs (and in many cases justify their very existence), I wouldn’t expect to see a lot of shops attempt to run on auto-pilot this summer.
Number two, its not 1989 anymore and trading volume comes from all over the world now. The spring/summer is every bit as liquid as the fall/ winter on The Street and even those traders and investors who do take it easy can still move and shake remotely via Blackberries and laptops.
So will Sell in May and Go Away work in 2009? I don’t make market predictions here but I will say that I despise maxims, so if it does, I believe it will be coincidental more than anything else.
That “apple a day” thing is the troof, however.
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