Sell in May and Go Away

Sell in May and Go Away: Definition, Strategy Backtest, History, and Statistics

Sell in May and Go Away” is a strategy suggesting investors should sell stocks in May and buy back in November to avoid typically weaker markets from May to October. The effectiveness is debated, as results vary year by year. Drawbacks include missing potential summer gains, transaction costs, and tax implications, oversimplifying market complexities.

Sell in May and go away must be one of the most famous phrases in the stock market. But is this adage a myth or a fact? Is sell in May and go away true? Plenty of myths in the stock market have never been backtested properly. There is a lot of academic empirical evidence showing this anomaly has existed for many decades, both in the USA and elsewhere, but we like to test ourselves.

Perhaps surprisingly, the phrase is spot on. It turns out sell in May and go away (stocks) makes sense, at least how we backtested it. The period from May until October is a seasonally very weak period for the S&P 500. May itself is not such a bad month, but the summer doldrums until the end of September have been weak for over 60 years.

Does this mean you should sell your stocks in May?

If you are a long-term buy-and-hold investor – no. Then you keep your stocks and forget about it.

However, if you are a short-term trader, you might exploit many of the seasonalities in the stock market.

Let’s start: What is the Sell in May and go away strategy?

Sell in May and go away backtest (stocks)

Is this just a myth, or is it correct? Let’s find out by looking at the historical numbers:

My data is the S&P 500 index from 1960, downloaded from Yahoo/finance. The index doesn’t include dividends and is thus excluding a vital part of the performance. It’s a cash index. However, the dividends are distributed throughout the whole year and shouldn’t distort the results so much (comparatively).

Let’s start by looking at the performance monthly from one monthly close to another:

MonthAvg. Profit%Win-ratio %Profit factorMax loss %
January1.18591.64-8.6
February0.0455.70.98-10.9
March0.8962.31.7-12.5
April1.5272.11.37-9
May0.0957.41.01-8.6
June-0.0753.30.9-8.6
July0.63501.45-7.9
August0.1558.31.02-14.6
September-0.55450.66-11.9
October0.9561.71.45-21.8
November1.4268.32.2-11.4
December1.3173.32.6-9.2

The profit factor is defined as the gross profit divided by the gross loss (including commissions) for the entire trading period. As a rule of thumb, I like this number to be above two as a stand-alone trading system.

The table shows that May is not a good month, but it still has three months that have performed worse. For some reason, September has been the worst month. Unfortunately, I can’t come up with any rational explanation for why some months are worse than others.

The numbers tell us that the period from October to the end of April is by far the best period, and opposite, the period from April until October seems to be the worst.

The sell in May and go away seasonality – backtest

We test the following on S&P 500 (the cash index, no dividends reinvested) from 1960 until today:

  • Buy the open on the first day of May, sell the open on the first day in October, versus
  • Buy the open on the first day of October, and sell the open on the first day in May.

Our time periods are not equal. We chose to exit in October instead of November because we know the 4th quarter is the best quarter historically.

Buying the open in May and selling the open in October gives this accumulated chart:

Sell in May and go away example
Sell in May and go away example

As we can see, it’s more or less a flat return! The annual return of this strategy is a negative 0.06%! Quite remarkably, you practically have no profits after 60 years of being invested from May until September!

Opposite, buying the open in October and selling the open in May gives this accumulated chart:

Sell in May and go away
Sell in May and go away

Now we are talking. The annual return is 7.2%, with only 57% exposure in the market (time in the market). The average winning period is 13.8% vs the average losing period of -7.5%.

As you can see, the sell in May and go away is true.

Sell In May And Go Away – OBX

OBX is the main index on Oslo Stock Exchange (Norway). Let’s look at how that exchange has performed.

I test the following on Norwegian OBX index from 1997 until today (OBX includes the 25 most liquid stocks on Oslo Stock Exchange):

  • Buy the open on the first day of May, sell the open first day in October, versus
  • Buy the open on the first day of October, sell the open first day in May.

Buying the open in May and selling the open in October gives this accumulated chart:

Total return is slightly negative (-0,41% annual return). There are just 5 losing months out of 17, but the average winner is “only” 11.69% versus the average loser of 24.95%. All 5 losers are bigger than 10%: 2001 (-26%),2002 (-35%), 2006 (-10%), 2008 (-30%) and 2011 (-22%).

Buying the open in October and selling the open in May gives this accumulated chart:

Annual return is 11%. The average winner is 16.13%, and the average loser is 11.31%. Three losing periods: 2000/2001 (-10%), 2007/2008 (-4%) and 2008/2009 (-20%).

The “skewness” looks nice:

Where does “sell in May and go away” come from?

The saying “Sell in May and go away” has its origins in the historical underperformance of stocks in the summer months compared to the winter months. This adage is part of a broader strategy known as the “Halloween indicator,” which suggests that the market’s strongest gains are usually made from November to April.

The phrase itself is thought to have originated in England, with the original saying being “Sell in May and go away, and come back on St. Leger’s Day.” This referred to the custom of London bankers leaving the city to escape the heat and not returning until after the St. Leger’s Day horse race, which is held in late September. The strategy implied by this saying is to avoid the stock market during the summer months, selling stocks in May and then buying them back after the summer, traditionally around September or October, when the market typically begins to pick up again.

Sell in May and go away – conclusion:

Sell in May and go away is not a myth. All the gains in the S&P 500 since 1993 have come from being invested from October until the end of April. One of the main reasons is that both August and September are the two worst months of the year in stocks.

Sell in May and go away

Let’s end the article by finding some answer to the following queries:

1. Sell in May and go away and buy back on the derby day?

Is this the same as sell in May and go away?

Yes, it’s more or less the same. But it’s a French phrase, though. In France, there is also an expression called sell in May and go away, but remember, come back in September.

2. Do stocks usually go down in May?

May is one of the weakest months, but the returns are not negative.

3. Why do people Sell in May?

There is no evidence to prove that investors sell in May. The performance of stocks are weak, yes, but that doesn’t mean people sell.

4. Sell in May and go away and come on back on St. Leger Day (sell in May and go away – buy again on leger’s Day) – is this the same?

No. St. Leger Day is in mid-September – too early to buy stocks. The last half of September has historically been weak, with the weak after OPEX day being one of the worst weeks for stocks throughout the year.

FAQ:

– Why is May considered a significant month in the stock market?

May is often regarded as the starting point for the “Sell in May” strategy. The article provides insights into why May holds significance in this context.

– Should long-term investors sell their stocks in May as per this strategy?

For long-term buy-and-hold investors, the article clarifies whether selling stocks in May is a recommended practice or if this strategy is more suitable for short-term traders.

– Does the “Sell in May and go away” strategy hold true for markets other than the S&P 500?

The article extends its analysis to other markets, such as the Oslo Stock Exchange (OBX), to determine if the strategy remains effective.

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