What Is ‘Sell In May And Go Away’ And Does It Work?

By: Wayne Duggan

There are plenty of old Wall Street adages that have been passed down for decades and are often referenced by traders and in the media. One of the more popular rules of thumb that tends to come up this time of year is “sell in May and go away.”

Smart traders know that just because a strategy is popular doesn’t necessarily mean its profitable. Here’s a closer look at what it means to “sell in May” and whether or not the strategy works.

The ‘Sell In May’ Trade

The idea behind “sell in May” is extremely simple, which should probably be a red flag right off the bat. The trade is based on the idea that trading volume tends to die down during the summer months and U.S. stocks tend to underperform. To counter that trend, the “sell in May” crowd dumps stock holdings at the end of April and doesn’t buy back in until the end of October.

From 1950 to 2015, the Dow Jones Industrial Average gained an average of just 0.3 percent annually from May to October, but it gained an average of 7.5 percent annually from November to April.

A Closer Look

At first glance, those numbers may seem to validate the “sell in May” trade. However, a breakdown of the month-by-month historical returns of the S&P 500 clouds the picture.

According to Yardeni Research, the S&P 500 has produced an average return of -0.1 percent in the month of May since 1928. In addition, the month of September has been by far the worst month of the year return-wise. The S&P 500 has averaged a -1.0 percent decline in September over the past 90 years.

However, the month of July has been the best month of the year for the S&P 500, which has gained an average of 1.5 percent during the month. In addition, the S&P 500 has averaged a 0.7 percent gain in June and a 0.6 percent gain in August, roughly average monthly returns for the index.

Takeaway

Sure, there may be some historical justification for the “sell in May” trade, but there’s no clear evidence that the underperformance during those six months is anything other than coincidence. Last year is a perfect example. The sell in May crowd missed out on an 8.1 percent rally in the S&P 500 from the end of April to the end of October. The S&P also gained 2.2 percent during the same stretch in 2016, 7.1 percent in 2014 and 10.2 percent in 2013.

In other words, the “sell in May” trade has not worked in four of the past five years. Even if there was a real pattern to play in years past, these types of patterns tend to disappear over time as more and more traders become aware of them and counteract them by attempting to time them for profit.

Lime Brokerage LLC is not affiliated with these service providers. Data, information, and material (“content”) is provided for informational and educational purposes only. This content neither is, nor should be construed as an offer, solicitation, or recommendation to buy or sell any securities. Any investment decisions made by the user through the use of such content is solely based on the users independent analysis taking into consideration your financial circumstances, investment objectives, and risk tolerance. Lime Brokerage LLC does not endorse, offer or recommend any of the services provided by any of the above service providers and any service used to execute any trading strategies are solely based on the independent analysis of the user.

You may also be interested in...

Partial Trade Deal, Partial Optimism
Read More
The IPOX® Week, October 14, 2019
Read More
What’s The Deal With These Expensive Restaurant Stocks?
Read More
Lime Brokerage Appoints New Chief Technology Officer
Read More

Try the demo

Compare Platforms
Check the background of this firm on FINRA's BrokerCheck

Our website uses cookies to improve the performance of our site, to analyze the traffic to our site, and to personalize your experience of the site. You can control cookies through your browser settings. Please find more information on the cookies used on our site in our Privacy Policy. By clicking OK, you agree to allow us to collect information through cookies.

OK