Sell in May, Go Away!

"Sell in May and go away," or something to that effect is a common theme brought up by financial news outlets during this time of the year. For many of my readers, this may be something you have never heard of, but it is something that should not be discounted.

"Sell in May..." (properly termed the Halloween Indicator) is the phenomenon that the stock market returns low and even negative returns in the summer. Many are unsure as to why this is the case, but statistically speaking, this anomaly occurs frequently enough that many professionals even sell their shares or execute hedging strategies. Once Halloween has surpassed, buying pressures re-enter the market.

As seen in the chart, we see that the months between May to October have historically returned a monthly return of less than 1 per cent.

The most accepted theory as to why this occurs is the belief that traders and professionals take vacations during the summer, as most of us do, and as a result, fewer traders are in the market. Money does not flow into the equity markets. Instead, they are use to fund holidays. This theory has many valid points and does make sense to everyday individuals.

In a 2002 research, 37 countries were analyzed, and in 36 of them, the phenomenon occurred. They also determined that this effect has been in the market in the United Kingdom since 1694.

However, many professionals in the academics of finance still believe this is superstition and becomes a self-fulfilling prophecy. The selling of equities during the summer months results in drops in stock markets.

One reason why many academics discount this effect is because of the Efficient-Market Hypothesis. The Hypothesis states that people should not consistently be able to beat the stock market's average return and that the stock market should not be predictable. Fair market prices are deemed accurate based on all information available in the market.

Although it has been statistically proven that you can beat the market in any given year by selling in May, we can easily provide evidence that it is not always a good idea. In the summer of 2009, world stock markets continued to rise after a world wide crash, and had returns in excess of 20 per cent in many exchanges. Those who sold in May would have missed out on 20 per cent and would have returned much less than the average.

So you see, although the saying does hold some truth, backed with decades of statistical data, we can see that every few years, returns in the summer can be very strong. Many believe this summer will provide strong returns as well, considering consumers are spending again and businesses have ramped up investments.