You’ve probably heard of the saying “sell in May and go away”. This piece of conventional trading “wisdom” states that the stock market is seasonally weak from May to September while it’s seasonally stronger from October to April. Hence you should not own stocks from May to September. From a seasonality perspective, that is only partially true.
*The traditional version of “sell in May and go away” means that you should sell from May to October, not May to September. But since October is a seasonally bullish month, we adjusted this to only include May to September. The stock market goes up on average from May-October.
But as you can clearly see from the above chart, the stock market is not particularly bearish from May – September. It’s merely less bullish (i.e. the odds of the market going down vs. up are equivalent). That’s why “sell in May and go away” is not a good trading strategy.
And keep in mind that the above seasonality chart only looks at the S&P 500. It doesn’t include the S&P 500’s dividends (which the Total Return Index does). So while the S&P may be flat from May – September, a stock market investor would have still earned positive returns via the dividends that companies issue.
The point is, sell in May and go away is not consistently bearish for the stock market. It’s irrelevant – the equivalent of a 50-50 coin flip.
Here’s the stock market’s performance during the past 10 years from each calendar year’s May-September. You can see that May-September is not consistently bearish for stocks. Some very strong rallies happened during this supposedly “bearish” seasonality.
The S&P rallied 5.6% from May – September 2017.
The S&P rallied 4.4% from May-September 2016
The S&P fell -7.9% from May-September 2015
The S&P rallied 4.7% from May-September 2014
The S&P rallied 5.2% from May-September 2013
The S&P rallied 2.4% from May – September 2012
The S&P fell -16.8% from May-September 2011
The S&P fell -3.3% from May-September 2010
The S&P rallied 20.5% from May – September.
The S&P fell -17.3% from May-September 2008.
As you can see, May-September is not consistently bearish for the stock market. The stock market has gone up 6 times and gone down 4 times from May-September. The average % change is -0.25%, which is hardly any different from 0%. When you factor in the dividends, investors actually made money from May-September.
This holds true if you use the Dow Jones Industrial Average over the past 100 years. If you use the traditional version of “sell in May and go away” (i.e. sell from May-October), you would actually be WORSE OFF than someone who just buys and holds forever. The Dow goes down 41% of the time from May-October (i.e. it goes up 59% of the time).
Moreover, there are clearly periods when buy and hold beats Sell in May. Look at the chart from 1931 – 1943. Buy and hold was up (made higher lows), while “Sell in May” kept on making new lows.