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Stocks: Sell in May and go away?

The fear that stocks are overdue for a correction has gnawed at many investors for months.
Image: Albert Young
Trader Albert Young works from the floor of the New York Stock Exchange on April 27 in New York. Market returns are typcially meager at best from May to November.Richard Drew / AP
/ Source: The Associated Press

The fear that stocks are overdue for a correction has gnawed at many investors for months.

Now they have new cause for concern, statistically at least. The arrival of May means the beginning of a six-month period in the stock market when returns typically are meager at best and often negative.

Is it time to scale back?

A seasonal timing strategy with a hard-to-ignore record for reliability suggests it is. "Sell in May and go away" holds that if you shift your holdings out of stocks into bonds, return to the market in November and do the same thing again every year, you'll come out way ahead.

Investors could be forgiven for smirking at the notion. Many financial professionals do.

"There's no easy formula regarding the best time to buy and sell investments," says Jonathan Bergman, a certified financial planner with Palisades Hudson Financial Group in Scarsdale, N.Y. "And don't try to time the markets."

Historical data
Yet this is no gimmick that forecasts the market based on numerology or the Super Bowl. It has enough historical accuracy behind it that plenty of financial advisers pay attention even if they don't agree or adhere to it, according to Austin Frye, a planner with the Frye Financial Center in Aventura, Fla.

"Sell in May" is more an indicator than a strategy. You'd be hard-pressed to find investors who withdraw their holdings on May 1 and put them back into stocks Nov. 1. But it may help guide investing decisions to know the implications of buying or selling at various times of year.

The concept has compelling support:

  • Since 1950, the Dow Jones industrial average has produced an average gain of 7.4 percent from November through April and 0.4 percent from May through October.
  • An investor who sank $10,000 into the Dow during the "best" six-month period (November through April) and switched to bonds during the "worst" six months in every year since 1950 would have posted a return of $529,285, according to the Stock Trader's Almanac. Doing the reverse would have cost the investor $474.
  • Applying the approach to the Standard & Poor's 500 index, its returns from November through April have beaten those during the following May-October period 71 percent of the time dating to 1945.
  • Adhering to the practice also would have reduced risk. For whatever reason, the stock market crashes of 1929, 1987 and 2008 occurred between May and October.

Why does it work?

While skeptics call it a random pattern or statistical anomaly, the period from Memorial Day to Labor Day features less market activity during vacation season, weighing on returns. And the rest of the year benefits from end-of-year bonuses, tax refunds and pension-fund contributions that translate to increased buying.

Market poised for a pullback?
This year, the approach may seem especially timely to those who believe the market is poised for a pullback after a period of remarkable gains.

Roaring back from the financial meltdown of 2008 and early 2009, the S&P 500 has risen 78 percent since bottoming out nearly 14 months ago. The Dow has rebounded 71 percent.

"Should you believe this bull market has come too far, too fast, and believe a challenging period lies ahead for stocks, you may want to consider this semi-annual rotation strategy," says Sam Stovall, chief investment strategist at Standard & Poor's.

Current stock values suggest a disappointing rest of the year in the market, according to Jason Hsu, chief investment officer at Research Affiliates in Newport Beach, Calif. "Valuation levels across the board are pretty well stretched."

All the positive developments about the economic recovery are priced into the market, Hsu maintains, while none of the bad things are: the outlook for continued high unemployment, rising federal debt, states' deepening fiscal woes and the prospect for higher taxes.

One problem with making a shift this May is that bonds don't have a great outlook, either, with interest rates expected to rise as the economy strengthens. When rates increase, bond prices decrease. As Stovall puts it, "Sell in May and go where?"

Then there's the matter of the adage not having held to form in 2009, when the Dow jumped 18.9 percent from May through October. (In the just-ended November-through-April period, it rose 15 percent.)

"Had we sold in May last year, we would have missed a huge rally on Wall Street and I would have faced a veritable client revolution in November," says Frye. "Given how well the market has done over the past twelve months, perhaps this is the year that the theory will work like a charm."