Sell In May and ...

Every year towards the end of April we read how investors should "Sell in May and Go Away", as the market enters what is traditionally its worst six month period of the year.  On the flip side though, the corollary to sell in May would be to buy in November when the market enters what is traditionally its best six month period of the year.  Below we show the average yearly pattern of the Dow from November 1st through October 31st over a 25-year and 5-year period.

Over the last 25 years, the Dow has risen by an average of nearly 10% from November 1st through May 1st, and then traded sideways from May 1st through Halloween.  However, as the Sell in May pattern has become more mainstream, its efficacy has weakened as investors anticipate the pattern.  In fact, over the last five years, the average return during the six month period from November through May is nearly equivalent to the average return from May through November.

 

Comments

[tc]

OK, I suppose this summer past doesn't count then?

The summer was a terrible time to be invested, and stating that the index recovered towards the end therefore everything's cool is backward.

When everything fell it hit the stop loss for anyone using reasonable risk management levels... not many that I trade with were successfully riding the storm.

[Marc]

"When everything fell it hit the stop loss for anyone using reasonable risk management levels..."

Isn't this the efficient market theory? ie. The market will do whatever it takes to wash out most investors. This is different from just looking at the data year to year.

M

[tc]

I thought efficient market hypothesis was that in 'strong form' all available info on the market is priced into securities.

I think the secondary trend of Dow theory might be where people getting kicked out of trades becomes an issue- i.e. in a correction - though i've been wrong before.