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It's May ... time to sell?

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It's May ... time to sell?.

'Sell in May and go away' is one of the best known and most often cited market wisdoms with origins stretching back to 17th century England. The Americans often refer to it as the Halloween indicator, alluding to the good sense of being invested in the stock market for the six month period following Halloween.

Furthermore, the mere fact that it has been so enduring suggests it is more than just a myth, and 300 years of data confirms that stock markets in the November to April period have outperformed by 3-4% the May to October period. While the data is strongest for Northern Hemisphere stock markets, many in the Southern Hemisphere also exhibit a similar trend (although funnily enough New Zealand is not one of them).

Many explanations for this phenomenon have been offered over the years, some are plausible but none really provide a satisfying solution to the puzzle. Probably the most common is that money managers take their summer holidays over this period and this leads to lower volumes and less buying pressure. But that doesn't explain the phenomena also working in the Southern Hemisphere, and nor does it consider that money managers nowadays remain connected to markets even while on holiday. Another explanation is that the tendency for stronger economic activity in the winter drives up investors' earnings expectations, while some point to the notion of an optimism cycle which is strongest in the New Year before reality dawns a few months later.

Despite evidence showing that there can be some seasonality in share market returns, the 'Sell in May' strategy can be fraught with risk. While some may argue that it doesn't matter why it works as long as it works, ultimately it is easier sticking to a strategy if you understand the rationale behind it. Furthermore, successful investing is a long term game and another well known market wisdom suggests that 'time in the market is more important than timing the market'.

 

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