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Sell in May, and go away?

By Dr. Don Taylor ·
Friday, May 2, 2014
Posted: 5 pm ET
Since the Dow was created in 1896, for example, the market has produced a 5.4% annualized return during winter months and 2% in the summer.

Like the swallows returning to Mission San Juan Capistrano for St. Joseph's Day on March 19 as spring approaches, another sign of spring is a discussion in the financial press on whether to: "Sell in May, and go away."

While this advice didn't even make my list of favorite investment adages in an earlier blog post, it's the first time I've blogged in May, so I wanted my chance to comment on this investment approach.

Why people consider this strategy

Mark Hulbert of the Hulbert Digest, writing for Barron's recently on this market pattern, reports that, "The seasonal pattern reflects the stock market's tendency to fare best between Halloween and May Day (the "winter" months) and to produce mediocre returns the other six months of the year (the "summer" months). Since the Dow was created in 1896, for example, the market has produced a 5.4 percent annualized return during winter months and 2 percent in the summer."

This 3.4 percent difference in average returns is highly significant statistically.

The other statistically significant finding by Hulbert was that in the years following a strong summer performance, the difference between the winter performance and the following summer's performance was even more pronounced, showing a 4.4 percent difference in the winter performance. With a 4.8 percent return last summer, does that increase the potential for ho-hum returns this summer?

Market patterns aren't expected to persist over time. When a pattern is present, what should happen is that investors anticipate it and take steps to capitalize on it, thereby reducing its effect. Instead, over the past 80 years, the Halloween effect has gotten stronger, according to Ben Jacobsen, a finance professor at Massey University in New Zealand, as reported by Hulbert in Barron's.

The fly in the ointment? While not having a sufficient number of observations to determine statistical significance, Hulbert found that in midterm-election years of a president's second term of office. the summer has outperformed. Will that be the case this year? Time will tell.

Should I stay or should I go?

To my mind, the one thing that could make it easier to decide to stay invested in the stock market this summer is the lack of attractive alternatives. Money market instruments (cash) have low yields as do the short- to intermediate-term bond market securities. Dividend yield income, plus even a modest increase in stock prices, may outpace these investments.

The Hulbert article considers "sector rotation" as an alternative to selling in May. Let's call that option, "reallocating in May to stay and play." Citing academic research on the topic, the idea is to find sectors that do as well in the summer as they did in winter. Academicians Ben Jacobsen and Nuttawat Visaltanachoti of Massey University in New Zealand, found that in U.S. markets, the consumer and food industries had comparable winter and summer performance.

The stock market, according to market prognosticators, is overdue for a market correction, generally considered a pullback of 10 percent or more. The stock market hit a new high at the end of April, but the Federal Reserve continues to dial back its purchases of Treasuries and asset-backed securities, and first-quarter gross domestic product grew at a snail's pace.

Are you planning to sit out the stock market this summer? Then there's time for some summer reading, "Long-term investing strategies."

Follow me on Twitter: @DrDonSays.

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