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Should I Sell in May and Go Away?

Should I Sell in May and Go Away?

You might be asking. What is this “Sell in May and Go Away”? Is’t a strategy, a myth or a baloney?

Let’s find out.

What is this “Sell in May and Go Away”?

According to Investopedia:

A well-known trading adage that warns investors to sell their stock holdings in May to avoid a seasonal decline in equity markets. The “sell in May and go away” strategy is that an investor who sells his or her stock holdings in May and gets back into the equity market in November – thereby avoiding the typically volatile May-October period – would be much better off than an investor who stays in equities throughout the year.

This strategy is based on the historical underperformance of stocks in the six-month period commencing in May and ending in October, compared to the six-month period from November to April. According to the Stock Trader’s Almanac, since 1950, the Dow Jones Industrial Average has had an average return of only 0.3% during the May-October period, compared with an average gain of 7.5% during the November-April period.

The chart above shows the S&P 500 with the six month cycle over a ten year period. The red arrows mark the start of May (bearish cycle) and the green arrows mark the start of November (bullish cycle). Source: http://stockcharts.com

This concept of “Sell in May and Go Away” is sometimes also called the “Halloween Effect,” which Investopedia defines as:

An investment technique in which an investor sells stocks before May 1 and refrains from reinvesting in the stock market until October 31, in order to increase capital gains. The Halloween strategy is based on the premise that most capital gains are made between October 31 (Halloween) and May 1, and that the other six months of the year should be spent investing in other investment types or not at all.

The Halloween strategy is closely-related to the phrase, “Sell in May and then walk away,” referring to the six months between May 1 and October 31. This strategy is heavily based on the concept of seasonality, specifically that stocks perform better in the winter months than they do in the summer months. This strategy is contrary to the buy-and-hold strategy, in which an investor may ride out down months.

Side note: Attend Lady Traders’ Confession 2016 on June 18, 2016 and listen to an all-female traders group: Nikki Yu, Charmel delos Santos-Marcial, Charmagne Feria, Gee Nillo, Ves Legaspi and Faith Catalan. Please visit Facebook event here: https://www.facebook.com/events/1707204172890443.
What are the reasons for such a calendar effect?
There are many reasons which financial market enthusiasts think of about this kind of calendar effect, some even tried to prove that such is a myth. Here are some reasons:
  1. Hot summer. According to Valentino Sy in his article “Sell in May and Go Away?” on April 30, 2012 for Philippine Star: “It has not escaped anyone’s notice that this year’s summer has been particularly hot. In fact, many traders have hit the beaches to relax and cool off. Even in Europe, many foreign fund managers take a vacation during the summer months of July and August. This reverses the strong fund inflows that we experienced in the previous month and may cause the market to correct.”
  2. Low sales. Some say it is due to a trickle effect from winter, and that companies need to “take a break” and this is the period when sales are generally low.
  3. Dreaded Ghost month. I have a related post discussing the August being the ghost month. During this month, markets generally take a dip.
  4. Known practice. Since it has become a historical practice, some investors have this belief that returns can only be earned for six months, and the rest of the months wiser to put in interest-bearing securities. The exit month is May.
How about in the Philippines?
While this phenomenon drives fundamentalists nuts, here are some reasons why in the Philippine setting, this “seasonally proven, historically proven” event could happen:
  1. Beat the summer heat. Same as above, fund managers and investors take summer break and this is the time to go on vacation leaves.
  2. Enrolment time. As mentioned also in Sy’s article, this is also the time when parents are preparing for tuition fee payment come June.
  3. Ghost month too. As spirits are believed to have come out, investors shun away from investing hence the lower trading activity.
Fact of fiction, CXO Advisory took a deep-dive into this investment mantra: See related article here.
So, should I follow the crowd?
Note: This article was written in 2013:
Now, looking at a historical chart of the PSEi, (please click image to view clearer) seems like the May 2011 and May 2012 exhibited a flat-to-dip trading activity. In 2010 it looks like it’s just flat with upward bias, while in 2009, seems like the index even went higher.
Updated chart of PSEI:
On the weekly chart of PSEI, let’s see if it will be able to break 7367.07 and if the 100-moving average line can hold:
You might be asking then: Should I follow the crowd?
  1. If you’re into a buy-and-hold strategy, then you might just ignore this trading advice and stick to your game plan, especially when you personally don’t believe it’s time to sell your stocks.
  2. If you’re in for dividends, you might just miss out the dividends opportunity in this period.
  3. If you believe in historical performance, and you personally have experienced making a mistake in the past by holding on to your stocks when the market took a plunge, then this trading advice may be for you.
  4. If your market outlook is quite dim, especially given the current high valuations of the market, the fear of a war spearheaded by North Korea, and the occasional news of economic crisis from Europe, (note: this article was written in 2013) then this advice may be good for you.
  5. And if you’re actually on the sidelines and haven’t done rounds of buying lately, maybe this might just be the buying period you’ve been waiting for. Watch out for opportunities to buy!

Please trade at your own risk.

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