‘Sell in May and Go Away’ is nothing but a myth

Share

Equity investors often hear about "Sell in May and Go Away" at this time of year.

It implies that investors should sell their equity securities in early May and buy them back in late October at a lower price. Dates most frequently connected to the strategy by technical and seasonal analysts are May 5 and Oct, 27.

Data over the past 66 years does not support the expression.

An updated study by EquityClock on the S&P 500 Index applying Oct. 27 as the buy date and May 5 as the sell date recorded a nice profit as expected. The S&P 500 gained an average of 8.42 per cent per period and was profitable 80.6 per cent of the time.

However, the study also found that applying May 5 as the buy date and Oct. 27 as the sell date recorded a profit averaging 0.20 per cent per period (thus not a loss) and was profitable 62.7 per cent of the time.

A shorter study of the past 20 periods confirmed that most profits by the S&P 500 Index were recorded during the October-to-May period. However, the date for the average optimal time for a seasonal low by the S&P 500 Index was adjusted to Oct. 15 and date for the average optimal time for the Index to reach a seasonal top was adjusted to June 15.

A "grain of truth" has been found in the "Sell in May and Go Away" expression.

A study of the past 20 May-October periods found that the S&P 500 Index experienced a correction in every period from their seasonal high to their seasonal low. Losses ranged from a low of 5.3 per cent in 2003 to the "grand- daddy" of losses in 2008 at 41.7 per cent. Average loss per period was 14.9 per ent. Moreover, most losses tended to happen within one month during the May-October period.

All corrections during May-October periods were triggered by unexpected events. The correction last year was triggered by Brexit. In 2015, it was triggered by a temporary melt down by the Chinese equity market. The correction in 2008 was triggered by a generally melt down by world financial markets. Corrections occur at random times during the May to October period.

What will be the trigger this year? It isn't clear yet. Perhaps, it is North Korea or U.S. health care. Perhaps, it will be taxes. How about trade wars?

In conclusion, the May-to-October period has a history of proving to be a danger and an opportunity. Investors are wise to be aware of the danger of a correction and should look for an opportunity to buy at seasonal lows after the correction has passed.

Investors can avoid most of the damage to portfolio values during the May-October period by using a simple technical indicator - the 50-day moving average.

The indicator is not perfect and occasionally is whip sawed, but it has proven to be reliable during most of the past 20 periods. When the S&P 500 Index moves below its 50-day moving average, it's time to lighten portfolio weights in ETFs and stocks related to the S&P 500 Index.

What is "Sell in May and Go Away" currently telling us about U.S. equity markets?

U.S. equity markets currently are overvalued based on technical parameters such as the Bullish Percent Index and Percent of Stocks Trading Above Their 50-Day Moving Average.

However, major U.S. equity indexes currently remain nicely above their 50-day moving including the S&P 500 Index at 2,399 with a 50-day moving average at 2,366, the Dow Jones Industrial Average at 21,007 with a 50-day moving average and the NASDAQ Composite Index at 6,101 with a 50-day moving average at 5,904.

The TSX Composite Index has a similar data profile to the S&P 500 Index. The Index at 15,582 is flirting with its 50-day moving average at 15,563. Triggers to avoid damage in Canadian equities and ETFs during the May-October period frequently occur at the same time as triggers by U.S. equity indices.

Liquidation of U.S. equities and ETFs because the May 5 date has passed is not warranted yet.

Current seasonal trades in selected sectors, such as biotech, technology and aerospace, continue to work and are good hold candidates. However, a correction exceeding 5 per cent between May and October this year is highly likely. Watching technical parameters closely to know when to take trading profits prior to the expected correction is preferred.

Disclaimer: Don Vialoux is author of free daily reports on equity markets, sectors, commodities and Exchange Traded Funds available a http://www.timingthemarket.ca/. The enclosed report is for information only. It should not be considered as advice to purchase or to sell mentioned securities. Data offered in this report is believed to be accurate, but is not guaranteed.