Sell In May And Go Away..

… is an often quoted stockmarket adage these days. It’s based on the historical underperformance of stocks in the 6 months from May until the end of October, compared to the period from early November to the end of April.

 

The significant seasonal trading pattern is a fact, based on data from the Stock Trader’s Almanac. Since 1950, the Dow Jones Industrial Average for instance has had an average return of only 0,3% during the May-October period, compared with an average gain of 7,5% during the November-April period. Same is true for the broader market (see chart ‘Monthly S&P 500 Performance Since 1960’).

 

The reason behind this pattern however is not exactly clear. It could be the lower trading volumes due to the summer vacation months that often create higher volatility and increased investment flows during the winter months that contribute for the discrepancy in performance.

 

And this seasonal trend isn’t solely based on historical US stock returns, according to a survey of 37 markets around the world conducted by the University of Miami. In the 14-year time period from 1998 to 2012, in each of those 37 markets, average half-year returns in the May-to-October period (0,95%) were found to be much smaller than those in the November-to-April period (10,69%).

 

Nonetheless, I would advise you not to follow the ‘Sell In May And Go Away’ strategy. First, average seasonal numbers should not be seen as something like an insurance against a crash. And a market-crash is as unpredictable as an earthquake, it can happen in June or January – or next Friday. Anyone who tells you otherwise or pretend to be able to predict a crash is most likely operating a financial scam with you as his next victim.

 

But even without a crash over the next 12 months, in a stock trade you should always take the transaction costs as the brokers’ commissions or the bid/ask spread (difference between the price the dealer paid for a stock and the price the buyer pays) and possible tax implications into account. 

 

Even with a discount brokerage account, heavy buying and selling is ‘dangerous for your financial health’. And if you still want to sell now to avoid the usually weak summer-performance and plan to return in November (and pay transaction cost again) – where do you want to ‘park’ the proceeds until then? In the current phase of negative interest rates and vanishing money market returns?  

 

Instead of a ‘market-timing’-strategy, I would stick to the good old longterm ‘buy and hold’-strategy. (More about ‘buy-and-hold’ and the remarkable investment-success of a woman who started with only 5’000 USD in tomorrow‘s post.)

 

However, if you want to ‘compensate’ for the probably not so juicy summer/fall period ahead on stock markets, why not diversify your investments into physical gold for instance?

 

As forecasted on this site one month ago (.. ‘the chances are quite good, that the rise in gold will continue throughout 2016 to levels of 1300 to 1350 USD’   see post of April, 1), Gold advanced yesterday above 1300 USD for the first time since January 2015.

The main driver for the surge in gold has been the weaker Dollar-Index, (that’s the value of the USD relative to a basket of 6 world currencies as the Euro, Yen, British Pound, Canadian Dollar, Swedish Krona and Swiss Franc) combined with negative interest rates, in some instances even negative real rates, that has made the opportunity cost in holding the metal practically non-existent. 

 

The price of gold has already risen by 23% since the start of 2016 but gold at 1400 USD an ounce in the next month wouldn’t surprise me.

 

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A pattern for decades around the globe: Stock market returns in winter/spring outperform those in summer/fall by far.

half year returns for markets

monthly sp performance

dollar basket

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