Thursday, June 16, 2011

Sell in May and go away

There is an old market adage of "Sell in May and go away". There is statistical evidence backing this, see the following two articles:

Sell in May and go away : Obstacle or opportunity?

A Google search on "Sell in May" revealed an astounding 1,450 million items. If you add 2011 to the search phrase the number of items dropped slightly to 957 million. A similar search on "Buy Low, Sell High" revealed only 172 million items. No search on other legendary axioms could come close to the number of items revealed by the search on "Sell in May".

This popular phrase is based on long-term statistics indicating that the best time to be invested in equities is the six months from early November through to the end of April of the next year - "good" periods, while the "bad" periods normally occur over the six months from May to October.


Anyone who’s been investing for a while has probably heard the homily “Sell in May and go away.” It’s a lilting reminder that the worst time of the year for stocks is usually the summer and the early fall. Going back decades, most of the money made in the stock market is made from November through April.

Some reasons behind this theory: People tend to feed their retirement accounts and invest bonuses early in the year. They go on vacation and ignore the market over the summer. Traders come back in September and dump companies that aren’t performing according to expectations.

Jeffrey Hirsch, publisher of the Stock Trader’s Almanac, offers some pretty persuasive numbers to support the argument. If you put $10,000 into the market on November 1, 1972, and spent 37 years selling all of your holdings on April 30 and rebuying on November 1, you’d have more than $160,000 today. You would have earned an average annual return of 7.4 percent, according to Hirsch’s data. If you’d taken that same $10,000 and, starting in 1972, done the reverse, investing every May 1 and selling every October 31, you’d have $7,863 and an average annual return of 0.4 percent.

It looks like this year is going to prove this old adage true again, with the Wall Street heading for the seventh straight down week, and our own JSE having losing steam over the past two months. But then this presents a better buying opportunities for investors in the next few months to come.