Sell in May and go away

May 20, 2013, 4:41 pm Julia Lee Yahoo7

Is there any truth to the old stock market saying "sell in May and go away"?

“Sell in May and go away” is an old adage in the market. The idea is to sell at the beginning of May and then re-enter stocks after Halloween. So is there any truth to the adage? And are investors better off being out of the market from May to October?

This year

With the US stockmarket still hitting all time record highs, it looks like the “Sell in May and go away” adage is dead for the US market. It is also dead for the Japanese market with a weaker yen helping the market to power along.

For the Australian market, the picture is a little different. A weaker Aussie dollar is usually good news for Australian companies listed on the Australian market. This is due to the fact that much of the revenue of Australian companies now comes from overseas.

But with Gold and iron ore markets moving into a bear market mean that resource stocks are under pressure. The 2nd quarter of the year does tend to signal a season peak for iron ore and that means further weakness might be ahead in the next 3 months. Resource stocks are important because material mining stocks make up 12% of the Australian market.

If we do see the “Sell in May and go away” adage ring true for the Australian market, it will be the traditional defensive sectors of telecom, healthcare, utilities and staples which outperform.

Crunching the numbers

On average, the worst months of the year are April and May. The best months are October and December.

May does tend to be a month that underperforms. Over the last 20 years, the Australian sharemarket has returned an average of -0.8% in May.

May to October

May to October tends to be a period that underperforms. In the last 20 years, the average return in this time has been 1.6%. That compares to November to May which historically has returned an average 5.1% over the last 20 years.

Do statistics lie?

The numbers don’t tell the whole story. While the Sell in May and go away would have outperformed in 14 out of the last 20 years, when it hasn’t worked it has been by a large amount. In the 6 years where the adage hasn’t worked, the market has returned an average of 13.3% in that period. Hence, relying on the adage may mean missing out on big returns when it’s incorrect.

Last year the market returned 14.6%. If you had not been invested May to October, you would have only seen a return of 11.9%.

End note

While the adage “Sell in May and go away” has been around for a while, you can’t rely solely on the statistics. It’s important to focus on the themes that are driving the market. This year, softness in commodities makes the adage more likely to be true. May is a soft month with most of the big banks trading ex-div. Once those dividends are paid in July, some of that money should find its way back to the market. If the market does experience a winter swoon, the sectors that outperform will most likely be the defensive ones like telecom, health, utilities and staples.

Happy trading!

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