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Sell in May and Go Away?

Monday, May 4, 2015

by Sheila & Rich Jamison

“Sell in May and go away" Is a familiar market adage. On average, the 6-months from May through October (the “weak” period) is weaker (produces lower returns) than the other 6-months (the November through April “strong” period). However, it is imprudent to make blanket investment decisions based on this. Why – and the deception on average imparts – follow.

The Background

The history of Dow Jones Industrial Index (DJIA) shows us some basis in reality for this old saying. There has been a difference in returns for its seasonally strong and weak periods historically.

From May, 1950 through April, 2015, excluding dividends, we have:

65 Strong & Weak Period Returns for DJIA      

Period % Return # Up Years # down years
Strong 7.54% 51 14
Weak 0.41% 39 26

Thus, historical bias – on the average – explains the saying’s origin.

The Forest and the Trees

This is a good place to digress a bit. Before we look at “on average” and its flaws, we’d like to address comments we’ve received on a number of our earlier articles. These delved into various investment philosophies or strategies, volatility, relative strength, the futility of prediction, pullbacks, buy and sell signals, and so on.

The Trees

We always endeavor to provide the logic, the statistical analysis and the underlying mathematics of our positions when we write about them. At the same time, we’ve also attempted to make these as ‘untechnical’ as we can without losing the rigor of the argument. (You would think this would be easy … but you try telling Rich his umpteen years of math and science training are not the stuff of most of us. You’d be amazed what he thinks is “English.”)

The Forest

Still, a number of you have said you don’t care about the details of the scientific method. You want to know we use it diligently in our process … but just give you the conclusion(s). So, here it is:

You work hard for your money.

We work hard to protect it.

The “Sell in May” Trees.

Averages can be misleading around the individual data points that comprise them. Imagine walking down the midway at a fair with your family. You see a booth with the cutest Teddy Bears. Worse, the 4-year-old in your group sees them too. Now you’re in the position of throwing darts at limp balloons in the attempt to win one for her. You pick the plumpest (that is, biggest) balloon as your target and throw your first dart. It misses by 3 inches to the right. You throw your second dart. It misses 3 inches to the left. On the average, you hit the balloon right in the middle. But they still won’t give you that Teddy Bear.

The Forest Overall

There's no question that the November to April period has provided substantially better returns overall. Whether you average it out, annualize it, compound it, or complicate it further; there is clearly a spread between the average 6-month returns during these contrasting seasonal periods.

The Trees Comprising It

That overall forest refers to a historical tendency. Along the way there have been down periods in the seasonally strong stretch. There have been up periods in the seasonally weak periods. So, yes, this adage has a strong historical bias to it, but it is not a "be all, end all" means of risk management.

Our May Trees

We enter a seasonally weak period this time around with the NYSE Bullish Percent on offense and our Dynamic Asset Allocation model still showing US equities in a leadership position with non-US equities coming up strong in second place. That means, for now we remain invested in equities, but are cognizant of our field position as we enter the seasonally weak stretch. (If that made your eyes glaze over, just remember the part above that says, “You work hard for your money. We work hard to protect it.”)

A Few Ornamentals

These are the trees that you walk past and say, “Hey, look at that!”

  • There were 26 out of 65 week periods that finished down during the timeframe examined. There were only 14 down years out of the strong periods – and only 4 in the last 30 years.

  • Since the April 30th, 2000, the Dow Jones Industrial Average is up over 65%. However, the weak periods during those years are cumulatively down -17%, while the strong periods have produced cumulative gains of 99%!

  • Only 26 of the years in our study had weak periods that were down. That means 39 years had positive weak periods. That’s 50% more positive weak periods than negative weak periods – with 5 of these up by more than 20%.

Bottom Line

No study and no adage can be the end-all for risk management. Still, it is interesting in that it exposes a bias within the market. We are coming off a seasonally strong period in the market which produced a gain of over 2.5%. And, at least as of this writing, we continue to see positive signs across the equity market. Thus, entering the seasonally weak period in the market - in and of itself - is not a call to abandon ship. It reminds us to continuously monitor for changes and increases in market risk indicators. As we summed it up earlier, we appreciate that you work hard for you money. Our pledge to you is we’ll work hard to protect it.

And, as always, please share this communication with anyone you feel could benefit from it.

Reference:
Data from Dorseywright.com and the Stock Trader’s Almanac, May 1, 2015.

Sources:
The Wall Street Journal; The Wall Street Journal Online; Bloomberg News; BBC News; The Associated Press; Crain’s New York Business; MFS research; NYSE; NASDAQ; Dorsey-Wright Associates; NYMEX.com; CNBC’s Power Lunch & Squawk Box programs; Investing.com; Markit.com; the New York Times; Standardandpoors.com; Djindexes.com; 247wallstreet.com; MarketWatch.com; Morningstar.com; thomsonreuters.com; the Financial Times.com; Briefing.com; BusinessWeek.com; Dol.gov; Fxstreet.com; Streetinsider.com; Ycharts.com

The data above were taken from sources deemed reliable. However no guarantee can be made as to their completeness and accuracy.
Interpretations of the data, views and/or opinions expressed are those of the Jamison Financial Group based on market and economic conditions as of the date of publication and are subject to change. They do not necessarily reflect the opinions of any other individual, group or organization.
Nothing in the above is meant to be, nor should it be construed as, investment advice or recommendations to buy or sell any security. Individual securities whenever mentioned are for illustrative purposes only and may not be relied upon as investment advice.
All indices are unmanaged and are not illustrative of any particular investment. A direct investment cannot be made in any index.
The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks.
The NASDAQ Composite is a market-weighted index of all the over-the-counter common stocks traded on the NASDAQ system.
The S&P 500® is a market-capitalization-weighted index of common stocks.
Tax and/or legal information contained herein is general in nature and for informational purposes only. It should not be relied upon as advice. Consult your tax professional or attorney regarding your unique situation.
Past performance is no guarantee of future results.

© 2015 Jamison Financial Group. Please feel free to distribute copies to individuals you feel may benefit from the information presented. Commercial use is prohibited.