Sell in May and go away...at your peril

Share

If you want to sell in May and go away, as the oft-repeated market-timing strategy goes, time is running out: May is around the corner, and with it comes no shortage of warnings that the stock market is about to turn rough.

Fortunately – at least for those investors who decide to ignore the warnings – May's reputation for bringing markets to their knees has been vastly overstated. Okay, the past two years were ugly. In May 2011, the S&P 500 fell 1.4 per cent, kicking off a five-month losing streak. And in May 2010, the S&P 500 swooped 8.2 per cent; the following month wasn't much better.

But for all the solid rationale for why May is a great time to exit the stock market – actually, there isn't any – the numbers provide little support. The Big Picture (via The Chart Store) has three compelling charts that look at the S&P 500 monthly moves, using data going back to 1928. In each case, May doesn't look exceptional enough to warrant an all-out retreat.

In terms of overall performance, the average return in May is all of a negative 0.16 per cent. Run for your lives! September and February average returns were considerably worse. As for the "go away" part of the "sell in May" strategy, June, July and August returns are good, ranging from average gains of 0.72 per cent to 1.49 per cent.

In terms of the number of positive Mays versus negative Mays, the numbers also don't support a full-on withdrawal from the market. Indeed, the month brings positive returns more often than negative returns, by a ratio of 47:35.

As for the range of returns, May is hardly extraordinary. The worst dip was 24 per cent, which is a little better than the worst dips for March and September. The best gain in May was 15.9 per cent, which beats the best gains for January, February, March, November and December.

Of course, there are any number of reasons to lighten up on stocks right now, from gathering storm clouds in Europe to weakening U.S. economic performance to the sheer fact that stocks are up a lot so far in 2012. But exiting because the month of May has arrived – and May rhymes with "go away" – doesn't sound quite right.