Seasonal indicators are always a tempting and counter-intuitive notion. Sell in May and go away?
Second in reputation only to the January effect “Sell in may and go away” is a common and well known seasonal indicator. I imagine the papers will soon fill with articles on this indicator. I think it’s a good time to examine the historical evidence.
“Sell in May and go away” refers to the abnormal returns of months November-April compared to May-October. This seasonal indicator is believed to exist due to the following reasons:
1. The summer months are usually dedicated to vacationing and time off in the capital markets as well.
2. Patterns in bonuses
3. Taxes and patterns in saving vehicles
A quick research – Should we really sell in May?
I’ve decided to take a quick look at some historical data. I’ve checked the S&P500 back from 1950’s up to today. The results of my research are displayed in the following charts. The bars represent the difference, in percentages, between the returns of November to April and May to October of a certain year:
The results as always are not definitive. Judge for yourselves:
1. In only 56% of the cases the months between November and April generated higher returns than the months between May and October.
2. However, on average, the months between November and April generated a return of 1.3% compared to just 0.2% for the months between May and October.
Adding a linear trend line suggests the spread is slowly disappearing but then again trend line don’t work well in a variable such as this (explains only 5% of the trend in this case). This could be attributed to more perfect markets with increased capital and information flow but it’s a reaching a bit.
What about 2008?
As always, the case before us is a special one. The months between November and April of 2007-2008 were the months of the sub-prime and credit crisis. Hopefully the months to come will be months of revived growth for the capital markets although skepticism is still wide spread.
One recommendation that has proved itself so far is to avoid timing the market and just hanging on if you’re investing for the long term (as you should). You never know what you might miss. We would all fail trying to time ourselves back in.abnormal returns, credit crisis, indicator, intuitive notion, january effect, line, notion, October, seasonal indicators, trend