Uncategorized, Weekly Update

Sell in May, but Only Every Few Years

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Published March 23, 2018


The theory of “sell in May and go away” is well-known in investment circles. Here is a summary of the theory from CNBC’s Bob Pisani:

It’s that time again: May. Springtime, and time to revisit that old adage — sell in May and go away.
I’ve written many times about this, probably the most famous of Wall Street saws, so I’ll keep this short.
You can argue about exactly why this seems to work, but over long periods there does appear to be something to it. Since 1950, the S&P 500 has had an average return of only 0.4 percent during the May-to-October period, compared with an average gain of 7.4 percent during the November-to-April period. This is according to Yale and Jeff Hirsch, who first brought this connection to light in 1986.
Sounds good, but in the past 10 years, they have refined this call by layering in two additional factors: a technical signal (MACD) and a signal based on presidential cycles.
The technical signal would get you in earlier than November 1 and keep you in longer than May 1 if the market was trending up. If the market was trending down, it would delay getting you in past November 1, and you might sell before May 1.
The other signal involves the presidential cycle: Don’t sell in May in the third and fourth year of the presidential election cycle, when markets tend to outperform. The Hirsches claim that this means you only need to make four trades every four years, greatly simplifying the process.
Combining these two signals, the Hirsches’ claim produces turbocharged results: an average return of a loss of 0.8 percent per year for the S&P 500 since 1950 during the May-to-October period, compared with an average gain of 9.6 percent during the November-to-April period.
For those of you who don’t get the power of compounded interest, let me make it simpler. A $10,000 investment made in 1949 from simply the May 1-October 31 period would now have $4,550, a LOSS of $5,450. The same $10,000 invested in just the period November 1-April 30 would have produced a profit of $2,166,331.
That is not a typo. $2,166,331.
You can see why this hoary saw has such staying power on Wall Street.

That summary from Mr. Pisani can be further simplified when we see that the “sell in May” phenomenon really only applies once every four years, on average. Mr. Pisani refers to this finding that remaining invested during year 3 of the presidential cycle is a winning strategy. That suggests that next year will be the year to remain invested as shown below.

Average 6-month returns since 1897, by year of Presidential term

Of course, none of these seasonal strategies is a surefire winner. So we stick with the value of our models and the signals they generate to keep us invested when we need to be.

Market Update

Stocks continued struggling this week with indexes having some of their worst days since the beginning of the market correction starting in February. Tech stocks came under pressure Monday with Facebook (FB) declining -7% on concerns that an inappropriate sharing of user data might harm user growth. The selling spread across the entire tech sector sending the Nasdaq down -1.8%. A slight bounce back Tuesday, but further pressure on Facebook and a sour earnings report from Oracle (ORCL) helped keep gains limited to +0.2%. The Federal Reserve raised interest rates Wednesday as expected. Nevertheless, investors sold the news turning a positive day lower -0.2%. Energy and materials stocks were among the only gainers, with commodities rising on a weaker U.S. dollar. Stocks tumbled all day Thursday sliding hard into the market close to a -2.5% drubbing. New tariffs on China to punish them for intellectual property theft appeared to spark the selling. Fears of a trade war weighed again on stocks in Friday’s session with selling once again picking up late in the day. Nike’s (NKE) strong earnings report initially pushed the Dow Jones Industrial Average positive. But the gains vanished in a flurry of selling in the last hour and a half sending stocks down more than -2% on the day.

A very negative week in the stock market with gains very hard to come by. The S&P 500 (SPY) slid -5.89% to rest on its 200-day moving average. The Nasdaq 100 (QQQ) was off -7.16%. The small-cap Russell 2000 (IWM) was a relative winner though still down by -4.69%. Small-cap stocks are viewed to be relatively less impacted by any international trade issues.

Warm wishes and until next week.