Tuesday, May 03, 2011
Sell In May & Go Away
History repeats itself for a reason, because they do, people never learn and they keep repeating their actions and decisions time in time out. This is the same posting I did 5 years back in May 2006, and repeated this in May 2008, and I should also repost this for May 2011. Personally, I don't think this May will be a down period, maybe June - July.
There is a familiar saying in capital markets "Sell in May and go away", made popular by author Jeffrey Hirsch who publishes the Stock Trader's Almanac. As I have argued before, in an average 12 months, you'd be lucky to have two periods of bullish phases, each lasting 3-6 weeks. The rest of the time will be punctuated by false rallies and bear traps, or just plain inactivity.
This is closer to the truth than most would want to admit. A broker would never say that to their clients, and most financial markets' employees would not voice that to their bosses. It doesn't help that most of the major corrections have taken place between May and October.
A factor which has not been cited for the May-October effect is bonuses/holidays. In order to put in the good figures for year end purposes, there has always been a covergence of interests for players involved to have a solid last quarter so that bonuses in the new year will be good. Plus, you have extended holidays with the last 2 weeks of December and the first week of January - hence you need the cash and peace of mind to have some fun. Generally nothing untoward will happen during end-December / early-January because of that.... a kind of financial detente. The festivity effect cannot and should not be under-rated. While it sounds naive but it happens. More good things happen when people are happy. Not just holidays, it could include important sporting achievements as well. May-October is also marked by a lack of holidays for all to look forward to - maybe we need to schedule more holidays into this period to effect a change in trend?!!
To sell in May and return after October is a good rule of the thumb, especially for "long only" players. In a revealing study: an investor who placed US$10,000 in the Dow average at the end of April each year since 1950 and sold at the end of October would have a net loss of US$272, while someone doing the opposite would have gained an astounding US$534,323. So, taking May-October off may not be just a good for your health but also saves you a lot of stress, plus improves your job performance smartly. This seasonal effect has more things going for it in developed markets such as the US, but not for the developing markets. Those who are more hard working would seek out gains in alternative markets during the lean May-October period. The May-October effect is there because it is a reflection of the nature of an equity market. You just do not have sufficient liquidity and market velocity to keep going the whole year round, or even 6-8 months.
p/s photos: Tiffany Lee Lung Yee