Is “Don’t Sell in May” the New Way to Go?

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“Sell in May and go away” is a Wall Street proverb that suggests investors should sell stocks in May and sit out the market until the end of November. The idea behind the rhyming rationale is that history shows that the market dips in the spring and remains a wasteland until the end of October. Or is that so?

Frank Holmes, CEO and Chief Investment Officer of US Global Investors, warns that investors should subscribe to the “sell in May and go away” mentality at their own peril. “Since 1988, the median return for the S&P 500 and MSCI Emerging Markets during May has been 1.22% and 1.28%, respectively,” Holmes was quoted as saying in a Financial Post article. “In fact, May returns rank in the top half for both indices. This is also a presidential election year in the US, which has historically produced positive returns. Since 1972, the stock market has rallied in 5 of the 8 election years, according to J.P. Morgan, with market gains of 12-26%. Only during recession years (2000 and 2008) did the S&P 500 provide negative returns.”

If that’s not enough reason, Eamonn Fingleton, a former editor of Forbes and the Financial Times, wrote earlier this month, “I have often wondered about the wisdom of taking a long summer break. I have never actually done so.” Quoting a historical analysis done by a Motley Fool contributor, Fingleton said there is some truth in the adage of selling in May and going away “but not enough to matter. It turns out that stocks do indeed tend to do a little less well in summer than in winter. But even if there were no adverse tax consequences or significant transaction costs, the difference is not enough to justify going into cash.”

May not that bad, history shows

Research done by The Big Picture, a blog run by strategist Barry Ritholtz, CEO and Director of Equity Research at Fusion IQ, an online quantitative research firm, shows that May is not that bad after all. From 1928 to 2011, Standard & Poor’s composite index lost an average of 0.16 percent in May, a narrower loss than 0.22 percent in February and 1.11 percent in September. As for the range of returns, May is hardly extraordinary. The worst dip was 24 percent, which is a little better than the worst dips for March and September. The best gain in May was 15.9 percent, which beats the best gains for January, February, March, November, and December.

Holmes said in a recent report that investors who employed the “sell in May” strategy last year averted an almost 17 percent fall in the S&P 500 and a nearly 25 percent fall in the MSCI Emerging Markets Index from June to September. “Summer of 2010 was a similar experience.”

But Holmes added, “[w]e believe it’s a much better market this year. After following a similar trajectory as the previous year from October to the beginning of March, improving economic data pushed the S&P 500 over 3 percent higher in March after trending sideways during the same time period last year.” Holmes said that US real GDP grew 2.2 percent in the first quarter, and nonfarm payrolls, ISM Manufacturing, and auto sales have all improved from a year ago. In addition, the global economy is improving, with company earnings momentum strengthening around the world.

Ride the global wave

“Instead of ‘selling in May and going away’ for the summer in 2012, we think investors should look to the global stock markets and ride the global wave,” Holmes said.

J Zechner Associates Inc., an investment firm, agrees with Holmes and believes maybe investors should not “sell in May and go away” this year. The company is bullish on the stock market, especially technology stocks in the US, the energy sector, and uranium producers. In the metals sector, it is slightly overweight on gold miners.

“In terms of the stock market, we are focusing on those sectors most leveraged to global economic growth, particularly technology, industrials and basic resources,” the company said. “Overall we continue to be bullish on the outlook for stocks even though we are somewhat surprised and disappointed that the cyclical stock markets, such as Canada, have lagged so many other markets so far in 2012, even though the global economic data continues to support expansion.”

Securities Disclosure: I, Karan Kumar, hold no direct investment interest in any company mentioned in this article.