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Has The ‘Sell In May’ Seasonal Pattern Gone Away?

  • Written by Syndicated Publisher No Comments Comments
    April 2, 2014

    The stock market has a very long history of making most of its gains each year in a favorable ‘season’ in the winter months, and being flat to down in the opposite unfavorable season.

    Ned Davis Research Inc., and Yale Hirsch of the Hirsch Organization, produced studies of the pattern back in the 1970’s going back several decades.

    Among many confirming studies since, an  academic study published in the American Economic Review in 2002 concluded that, “Surprisingly we found this inherited wisdom of Sell in May to be true in 36 of 37 developed and emerging markets. Evidence shows that in the United Kingdom the seasonal effect has been noticeable since 1694.”

    A study in 2011 of the S&P 500 from 1993 to December, 2010 by Zacks Investment Research, was based on a slight variation of the basic Sell In May strategy. It changed the entry date to the sixth trading day before the end of October rather than November 1, but retains the rule to exit on May 1. Its conclusion was that, “For the S&P 500 a buy & hold investor turns $1 on February 4, 1993, into $1.96 on December 31, 2010, whereas Sell in May and move into cash, counting interest on cash (the Fed Funds monthly rate), and dividends for the buy and hold, had a final wealth of $3.73, some 90.7% higher. Applied to the Russell 2000 Index, the final wealth was $2.04 for buy and hold, and $4.94 for Sell in May, 141.7% higher.”

    Of course the market does not begin a rally each year exactly on Nov. 1, or roll over into a correction exactly on May 1 each year. My own ‘Seasonal Timing Strategy’, or STS, utilizes a technical indicator that varies the entry and exit dates by as much as two months depending on whether the indicator is on a buy or sell signal when the calendar date arrives. Our own and independent studies show that it has more than doubled the excellent performance of Sell in May and Go Away, back-tested to 1970, and in real-time in our newsletter since we introduced it in 1999.

    But has all that history gone away?

    Wall Street would like to have investors believe so, and makes much of the fact that seasonality ‘didn’t work’ for two straight years now.

    And that is true, at least to the extent that there was not a significant correction in the summer months in either year, as the Fed pumped in additional stimulus to prevent a correction from taking place. The so-called ‘Bernanke Put’ had a positive effect.

    But even against that massive Fed influence, even in those years the effect of seasonality could be seen.

    Even though there was no correction last year, the market made most of its impressive gain for the year in the favorable seasons, and was basically sideways in the unfavorable season.

    That was also true in 2012. So two straight years when a seasonal strategy did not outperform the market, but when its effect was clear even when faced with the massive stimulus.


    The big question for this year regarding seasonality is whether it will be three straight years that it does not outperform the market.

    Or will it more likely resemble 2011, when massive QE stimulus did not succeed in preventing a 20% market plunge in the unfavorable season, and the only thing that prevented it from becoming even worse was the Bernanke Fed rushing in to more than double the QE from $40 billion a month to $85 billion.

    It seems like a fair question, since the Fed is now tapering back stimulus, and this month will have it back down to $45 billion, its level of 2011 before it was doubled, and will have it down to $35 billion in May, $25 billion in June.

    Our STS strategy is still in its favorable season, and 100% invested in the DJIA.

    While the exit signal for Sell in May takes place mechanically on May 1, the exit signal of our STS seasonal strategy varies and has taken place any time from mid-April to late June.

    I have a feeling it will be an important signal this year, given that this is the usually negative 2nd year of the Presidential cycle, in which the average decline has been 21%.

    But then I expected last year’s signal would be significant, coming in the usually negative first year of the Presidential cycle. But I was wrong.

    So we shall see.

    STS has made its biggest gains in bear markets, as well as proved its value in having investors positioned for them when they take place.


    To read my weekend newspaper column click here:  Why Mutual Funds Managers Cannot Protect Investors In Bear Markets 

    Images: Flickr (licence attribution)

    About The Author – Sy Harding, Street Smart Report

    Sy Harding publishes the financial website Street Smart Report Online and a free daily Internet blog at Sy’s Free Blog. In 1999 he authored Riding The Bear – How To Prosper In the Coming Bear Market. His latest book is Beat the Market the Easy Way! – Proven Seasonal Strategies Double Market’s Performance!

    It includes our research and analysis on the economy and markets, and provides charts and buy and sell signals on the major market indexes, sectors, bonds, gold, individual stocks and etf’s, including short-sales and ‘inverse’ etf’s.

    It provides two model portfolios as guides. One is based on ourSeasonal Timing Strategy, one on our Market-Timing Strategy.

    In depth updates are provided every Wednesday, with interim ‘hotline’ updates every time we make a trade. An 8-page traditional newsletter Street Smart Report is provided on the website every 3 weeks, in pdf format for viewing or printing out.

    There is the Street Smart School of online technical analysis ‘seminars’,commentaries to keep you ‘street smart’ about Wall Street, and much more. 


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