Sayings like these give journalists topics to write about:
Sell in May and go away, and come back on St. Leger’s Day.
Pro tip: Most of the stuff you’ll read is garbage.
That’s where all this “sell in May” stuff came from in the first place. The inference here is that there’s no point trading in the summer. All the brokers and fund managers will be out in the Hamptons working on their tans.
The original saying suggests that the big boys won’t get back to business until horse-racing season in England is over in the fall. The British have been celebrating this day in September since the St. Leger Stakes, the last leg of the English Triple Crown, was established in 1776. We Americans like to call this time of year “football season.”
The reason we still look at this today is because through 2016, all the gains in the Dow Jones Industrial Average since 1950 had come between the months of November and April. In other words, had you bought the Dow every May 1 and sold on Halloween every year since 1950, you’d have had a negative return.
The past two years have turned this number slightly positive, but I think you get the point. We traditionally see underperformance in what the Stock Trader’s Almanac refers to as the “Worst Six Months.”
Does this mean we should sell our stocks every May 1?
The way we look at seasonality is not to buy into a “seasonally strong” period or sell prior to a “seasonally weak” period. We’re more interested in when the market ignores seasonal tendencies. That’s when we want to pay attention.
Did the market do well when it was supposed to act poorly? Was there an overwhelming amount of selling during a bullish time of the year? These are the questions we want to answer.
A good example is 2008, when stocks sold off violently during the “Best Six Months.” From November 2007 through April 2008, the Dow Jones Industrial Average lost 8%. This preceded one of the most historic crashes of all time. Stocks ignoring traditional seasonal strength was a heads up.
The Dow was down 2.2% in 2000 during the “Best Six Months,” which coincided with another important peak in stocks.
On the flip side, stocks did well during the “Worst Six Months” in 2016 prior to any U.S. election. The lazy call it a “Trump Rally.” The rest of us know better.
So, let’s fast forward to today. Now that the “Best Six Months” is over, did stocks do well, like they were supposed to? The Dow Jones Industrial Average was up 5.8% during this period. I see nothing unusual about this.
If you want to dig a little deeper, the Nasdaq 100 gained 11.7%, and the much broader Russell 3000 Index was up 8.5%.
So, should we “sell in May and go away”?
Maybe… but “seasonality” shouldn’t be the reason. I don’t see anything unusual about the market’s behavior the past six months. Everything seems perfectly normal to me.
I hope this helps clear up some confusion on the matter. Let me know if it hasn’t…
Watch: Every “Breadth” You Take
Market “breadth” means a lot of things to a lot of people.
The way I see it, we’re analyzing a market of stocks. There are a variety of tools to help us do that, including the advance-decline line, lists of new highs and new lows, and the percentage of stocks getting overbought or oversold, which can be calculated in many ways.
Have a great weekend.
To wise investing,
Editor, Big Market Trends