If you are into investment newsletters like I am, you read a lot of them. Right now, almost every one of them is making mention of that yearly phenomenon summed up by a common Wall Street saying, “Sell in May and Go Away.”  

The saying refers to the stock market’s habit of taking a summer swoon and a September plunge each year. It then recovers for its traditional year-end Santa Claus rally. And there is some truth in the saying.

Remember last year? The market peaked in late April and then didn’t return to rally mode until the leaves were falling in the fall. Market historians point to the pervasiveness of the market’s tendency to follow this pattern. Here’s the monthly history, and it’s true – the summer is not pretty when it comes to stock prices:

Steve Reitmeister over at Zacks.com Weekend Wisdom column summed it up by saying

If you invested $10,000 in the Dow Jones Industrial Average back on May 1, 1950, and sold on October 31, 1950, and then repeated this 6-month holding approach every year through 2010, you would have actually lost $379 over that 60-year stretch.

On the other hand, the same strategy applied to the other 6-month stretch (buy on November 1st and sell on April 30th) would have produced a whopping $609,071 in profits.

The above is true. But once we pull back the curtain on the rest of the facts…it’s not really so ominous.
• 59% of the time the stock market went up from May through October.
• 5 of the last 7 years have been profitable during that span.
• Some big profitable summers recently include +18.9% in 2009 and +15.6% in 2003.

The next most logical question is: How can these seemingly contradictory facts all be true?

Because some of those losing years were disastrous, like -27.3% in 2008, -15.6% in 2002 and -20.5% in 1974. So yes, a few bad apples do spoil the whole cart.

Notice, even with those bad years, the monthly chart demonstrates there is often a very good July in the midst of all the other down summer months.

And did you know that in election years the pattern often reverses? Yup, July is down, on average, when we are in a Presidential Election Year, like this one. But the months of May, June and August are up in 70% to 80% of the Presidential Election Year cases going all the way back to 1932!

So it’s a mixed bag on the usefulness of the saying. Consequently, I’ve modified it a bit. Instead of “Sell in May and Go Away,” I think it’s more accurate right now to say “Sold in May, Then Stayed Away,” because that is exactly what’s been happening with stock market mutual fund investors.

Last May (2011), investors moved $1.1 billion out of US Domestic Equity Funds, according to the fund flow experts at Lipper. And it’s been one-way traffic ever since. Every month since then, the amount of withdrawals from US stock funds has exceeded additions. And the amount of the decline has exceeded the prior year’s monthly change in every instance – so it’s not a seasonal shift.

Now, admittedly, this investor preference for, first, bonds, then, international equity and, lastly, domestic equity funds, appeared to have some validity in the third quarter of 2011. The performance of each fund class was (respectively) 14.55%, -20.44% and -16.67%.

But for the next two quarters (fourth quarter, 2011 and first quarter this year), the results were just the opposite of what these investors were expecting. Bonds gained 2.5%, but international equities netted 9.1% and US domestic equity funds gained 22.6%.

Of course, we approve of active investing. And exiting the stock market before last May was certainly the right thing to do. But so was coming back in when September rolled along.

The trouble with most investors is that they don’t have a plan. And it is so difficult emotionally for them to exit one investment and buy another; to expect them to repeat the process in a short period of time without a plan is just too much to ask.

That’s where we come in. Our computerized strategies are monitoring the market objectively, unemotionally and daily. They signal the exiting of one fund for another based upon a trading plan founded upon sound research of market history that transcends the simplicity of “selling in May and staying away.”

All the best,

Jerry

Disclosures