Friday, May 29, 2009

Sell in June and go away

The familiar Wall Street adage “sell in May and go away” might better be updated as “sell in June and go away.” Over the last 20 years, stock market performance in May has been quite good, but June and the following months much less so. Here is a chart of the seasonal performance of the S&P 500 over the last 20 years (blue line), along with longer periods, 50 years and 100 years, for comparison.



It is apparent that seasonal tendencies change over time. Note that the traditional summer rally, clearly visible in the 100-year seasonal, has been replaced by a summer slump in the 20-year. May, which used to be a weak month prior to 1985, has been a strong month since then.

Are past seasonal tendencies of any use in predicting future stock market returns? What if we base each year's trading decisions on the seasonal average of the previous 20 years?

I tested the following trading rule:

  • Sell on the day when the seasonal average of the prior 20 years hits its highest point of the first six months of the year. In 2009 this would be June 5.

  • Buy on the day when the seasonal average of the prior 20 years hits its lowest point of the last half of the year. In 2009 this would be October 9.

Using this rule over the years 1970-2008, during the period when we were in the market, generally some time in the fall through some time in the spring, the S&P 500 advanced at an annual rate of 7.97%. During the period when we were out of the market, during the summer slump, the S&P 500 advanced at an annual rate of 2.02%. A noticeable difference, for sure, but not one that makes you want to sell for this reason alone.

In 2008, using this rule, we would have sold out on June 5 (not bad—very close to the high for the year) but bought back in on September 24—just in time for the crash of '08 and a 24% drop to the end of the year.

The bottom line is that the market will be facing a moderate seasonal headwind for the next five months, but other factors, as they usually do, will outweigh the seasonal effect.

More on "sell in May" at Investment Postcards and Bespoke.

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