You’ve almost certainly heard the old stock market adage, “Sell in May and go away”. It’s existed for decades now, but a lot of investors have no idea where it came from. On this week’s Mullooly Asset Management podcast, Tom and Brendan discuss this adage, the topic of stock market seasonality, and their functionality in the overall investment process.
So where did “Sell in May and go away” come from? It’s kind of an unexplained phenomenon. In general, stocks have tended to underperform from May 1st-October 31st and outperform from November 1st-April 30th. The adage suggests you sell your stock holdings in May to avoid the seasonally weak period of the year. Interestingly enough, the Stock Trader’s Almanac ran numbers to test the market adage and they support it. If you invested $10,000 in the Dow Jones Industrial Average from May 1st-October 31st every year since 1950, you have lost money. Conversely, if you invested $10,000 in the Dow Jones Industrial Average from November 1st-April 30th every year since 1950, you’d now have about $826,000. So the seasonally strong and weak period truly are night and day when it comes to returns.
What does this mean for investors though? Should they be “all in” every November-April and “on the side lines” every May-October? No. If you look at the yearly numbers since 1950, there are years where this adage of stock market seasonality simply doesn’t work. Take this year for instance: during the seasonally weak period we saw positive returns from the Dow Jones Industrial Average and the S&P 500. That’s not something you would’ve wanted to be 100% out of the market for.
After all, adages are general truths and not meant to be taken with 100% literality. In fact, Jeffrey Hirsch of the Stock Trader’s Almanac has said the following:
“While I am a strong proponent of historical and seasonal market patterns, I am always mindful that history never repeats itself exactly. I have used history as a guide for navigating current market conditions and anticipating trends with quite a degree of success over the years. What we try to get Stock Trader’s Almanac traders and investors to do is not necessarily follow historical patterns to a “T,” but to keep them in mind so they know when their radar should perk up.”
This perfectly explains the use of stock market seasonality studies. We find this type of information to be enlightening and extremely interesting. Currently, the seasonally strong period of the market is upon us and with solid support from our short, intermediate, and long term indicators. The key to the previous statement is “with solid support from our short, intermediate, and long term indicators”. At Mullooly Asset Management, we always say “When the charts change, we will change”. Market seasonality is just another way we can help to stack the odds in our favor when we invest.
Make sure to listen to this week’s Mullooly Asset Management podcast to hear Tom and Brendan discuss stock market seasonality.
Source:
http://www.aaii.com/journal/article/using-seasonal-and-cyclical-stock-market-patterns.touch