Origins of the Sell in May and Go Away
The famous adage "Sell in May and Go Away" is believed to have originated from an old English phrase that says, "Sell in May and go away, and come on back on St. Leger's Day." It is a yearly custom for the aristocrats, merchants, and bankers to leave London and go to the countryside during the hot summer months. They would then come back on St. Leger's Day, which refers to the St. Leger's Stakes thoroughbred horse race in mid-September. In the U.S., investors and traders tend to spend time away from the offices going on vacation between Memorial Day and Labor Day.
6-month Stock Market Performance
In the financial markets, the expression "Sell in May and Go Away" refers to an investment strategy to sell the market (or go away) from May 1st to October 31st and then buy (or return to) the market from November 1st and April 30th. The premise is stocks tend to underperform during the six-month window beginning in May and ending in October and outperform during the six months from November to April.
Reasons for Market Performance
The stock market outperformance during the November to April period is explained by the following:
(1) Major holidays occur during this time (i.e., Halloween, Thanksgiving, Christmas, New Year, Valentine's Day, St. Patrick's Day, Easter, and Mother's Day).
(2) Spending picks up during this period (i.e., back-to-school spending, Black Friday, and Cyber Monday sales).
(3) Reinvestments plans are most active during this time frame (i.e., 401k, 403b, 457, 401a, Defined Contribution, and Benefit Plans).
(4) Other payouts (i.e., year-end employer bonus, tax refunds during spring, and year-end capital gains and bonus dividends reinvestment plans).
In summary, a lot of money circulates within the economy from November to April, including retail spending, investment inflows, and reinvestment programs.
Is it true that during the warm, summery periods when trading volume is low and presumably many market participants are on vacations, this leads to volatile and lackluster performances in stocks?
When you factor in the concerns surrounding the new variants of the virus that cause COVID-19, inflationary fears, and the uncertainties to the re-opening, it may be worthwhile for traders and investors to delve further into the seasonality tendencies.
What are the Seasonality Tendencies saying?
Numerous academic and Wall Street studies have been conducted to determine the validity of the six-month seasonality investment strategy. Although it remains a hotly contested subject, the data does show that, on average, the November to April periods tend to outperform the May-October periods.
Note that past performances are no guarantee for future success. However, unlike many other seasonal patterns, it has been remarkably consistent, and some say even robust, as evidenced by the sharp contrast in performance between the two time periods.
In the past 20-years, the wide discrepancy between the two timeframes is quite noticeable within SPX, INDU, SML, and MID, while less so with the COMPQ and NDX. For instance, during the weak May to October period, SPX generated an average return of 2% from May to October as compared to an average return of 5.6% during the seasonal strength period from November to April. Nearly 74% of the yearly SPX return (7.6%) came from the seasonal strength period from November to April. The outperformance is also repeated in INDU (1.8% vs 5.6%), SML (2.6% vs 8.4%), and MID (1.3% vs 8.9%).
We find it interesting the two over-the-counter markets, COMPQ and NDX, did not follow the seasonality tendencies of their listed and smaller market-cap peers. For example, in the past 20-years, COMPQ returned 5.3% from May to October as compared to 6.6% from November to April. It is surprising to see NDX showed identical performances of 6.6% for each of the two timeframes.
Since the top 10 biggest market-cap-weighted names in NDX accounts for 52% of the overall index, and many suffered extensive corrections over the past few months, will the mega-cap Technology and growth stocks avoid the sell in May and go away trading phenomenon this year?