April 30th, 2010
Sell in May and sail away?
It still holds true, current research shows that the old investment adage “selling in May and sailing away” still makes a lot of sense, according to an analysis of market history.
A look at the performance of the Dow Jones Industrial Average over the 59-year period through 2009 shows that the index produced an average gain of about zero during the six-month periods from May to October, according to the 2010 Stock Trader's Almanac.
Over the same 59 years, the Dow averaged a 7.4% gain during the six-month periods from November through April.
To put it another way, $10,000 invested in the Dow during each of the May-through-October periods beginning in 1950 would have generated a cumulative total loss of $474.
But $10,000 invested in the Dow index only during the November-through-April periods would have generated a total return of $534,348. Wow!
The general rational for the seasonal market slump has been that May represents the start of vacation season and the reduced trading activity tends to pull down or hold down the markets. This is especially true in foreign stock markets. University analysis shows the system has worked in 33 of 34 countries tested.
Following the pattern in 2008 would have helped investors avoid a 27.3% drop in the Dow. Of course, the index still lost 12.4% during the following November-to-April stretch.
Getting out in May last year would have meant missing out on an 18.9% gain, while the following six months produced only a 15.4% gain.
While the research proves an advantage over the long term of strictly following the trading strategy, prudence dictates it is always best to take into consideration the overall market and macroeconomic environment, and of course, your tollerance for risk and time frames.
As of now, late April 2010, the Dow is coming off a really good run, and there are all kinds of technical and geopolitical issues to consider such as the debt crises in Greece, Spain, Portugal and Ireland. It might be a good time to tighten some stop orders and put some limits on new stock and mutual fund positions.
Barry Unterbrink, CRPC