Jun 15, 2022
If you decide to sell in May, and then go away and leave the market in May, and wait things out through the summer and into early fall before reinvesting in stocks in November. Since 1945, the Standard & Poor's (S&P) 500 has gained, on average, 2 percent from May to October. The same index posted an average increase of 6% from November through April. In the more recent times, since the year 1990, these figures have remained the same at 3 percent and 7%, respectively.
You'll frequently see Sell during May and Go Away being mentioned in conjunction with or alongside "the Halloween Indicator." This phrase was created because if you adhere to this Sell in May then Go Away method, you'll find yourself back into the market around the beginning of November, just after Halloween. Setting an example that doesn't apply to the majority of people, this strategy is believed to have been developed several centuries back within the U.K. when wealthy investors would quit the stock market during May and spend their time in the countryside, never paying any focus on their portfolios of investments for the rest of the year until fall.
The contemporary equivalent is big investors, like hedge fund managers who leave New York City for the summer months to escape to the Hamptons. However, with the advent of online and 24-hour trading, this summer break impact might not be as prominent as it used to be when traders would spend most of their work hours on the floors of the New York Stock Exchange or a Manhattan office.
Financial markets were affected by seasons linked to farming; however, these are likely to have diminished in importance due to farming's drastically diminished economic significance. Regarding the timing of investment flows, seasonality could continue to exist as a result of the year-end financial industry or business bonuses, with the mid-April U.S. tax filing deadline posing a factor. Whatever factors are involved, the historical pattern has become more evident due to the stock market collapse of October 1987 and the 2008 market crash.
The biggest drawback with traditional patterns of the past is that they cannot accurately forecast the future. This is especially true for popular patterns from the past. If enough people be convinced that the "Sell in May and then Go Away" pattern will not go away, it will, in actuality, quickly begin to fade away. Early bird sellers would want to sell in April and compete against one another to purchase the stocks again ahead of the rest of the market in October.
The averages of the seasonal tendencies hide significant fluctuations between years naturally. Every year, the effect of seasonality can be masked by a range of other, sometimes more pressing issues. Selling in May would have done anybody who believed in that adage nothing in 2020, as the S&P 500 plunged 34% over five weeks between March and February when the COVID-19 virus swept through but rebounded to 12.4 percent between May and October.
In actuality, during the decade from 2010 to 2020, the unfashionable summer portion of the year saw an impressive, if not spectacular, return of 3.8 percent, and there was little or no change from 2011 in the opinion of LPL Research. "Sell in May" has been a bit off in the early 2022 period and early 2022, with the S&P 500 slipping 8.8 percent in April and 13.3 percent since the beginning of the New Year. In conclusion, although the trend is evident, its predictive value is questioned, and the potential cost could be significant.
Instead of taking the adage literally and relying on the belief that this pattern will last may shift from riskier market segments to those which tend to perform better during periods of market decline. For instance, a customized index that represents the method of rotating between the consumer staples and healthcare stocks that are held from May to October and more sensitive markets from November to April would have over-performed S&P 500 in both periods between 1990 and 2021 in the opinion of Pacer ETFs, the sponsor of exchange-traded funds that are trying to implement this seasonal change for investment purposes.