Sell in May and Go Away ?

A common saying on Wall Street is “Sell in May and Go Away”, meaning it's time for you to sell your stocks and take a vacation-because the stock market is going to drop in the summer months.

But, is this saying based in fact or is it just some kind of myth?

Last year it worked, if you sold on May 1st of 2008 and bought back in on October 31st of 2008 you would have avoided a 31% drop in the S&P 500.

But, what if you go back further?

Historically, long-term statistics reveal that most market down periods occur over the six months from May to October. Furthermore, many historical studies show that the old adage holds water.

I crunched the numbers back to 1950 and according to my calculations if you invested $10,000 into the S&P 500 with a strict sell on May 1, buy on October 31 strategy, you'd have more than $500,000 on May 1 of 2009. If you'd just bought and held the S&P 500 during the same period you would have less than $80,000.

Hence “Sell in May and Go Away” has a history of success. But, past performance is not indicative of future returns and does not work every year.

Some negatives to this strategy include higher short-term tax rates because you hold stocks for less than a year, and you pay more commissions than simple buy-and-hold investing.

The “Sell in May and Go Away” strategy works due to seasonal factors like the so-called Santa Claus rallies that typically boost November, December and January performance due to holiday spending. And, April is normally a good month for the market due to optimism on the upcoming first-quarter earnings reports.

And, remember to have a happy May Day tomorrow!

Best Wishes,
Ted Peroulakis.