Why it pays to sell in May
Commentary: Be ready to sell at the first sign of market weakness
By Mark Hulbert, MarketWatch
CHAPEL HILL, N.C. (MarketWatch) — Investors should strongly consider cutting their stock exposure this coming
May Day and parking the proceeds in cash until Halloween.
That advice comes courtesy of a famous piece of Wall Street folklore that is known by the adage “sell in May and
Unlike most of the other stories investors tell, however, the historical evidence in favor of this one is
surprisingly strong. And deeper drilling into the data suggests there are ways to tweak the approach so that you
don’t have to dump stocks entirely to capture some of the benefit.
You might also know of the “sell in May” pattern by its other name, the “Halloween indicator.” Both refer to the
pronounced tendency for the stock market, on average, to turn in its best returns between Halloween and May Day —
referred to loosely as the “winter” months.
The historical evidence in favor selling in May is very strong.
The stock market’s average return during the other half of the year, the “summer” months, is far lower.
This pattern has been very much in evidence in recent years. Since the seasonally favorable period began last
Halloween, for example, the Dow Jones Industrial Average (DJI:DJIA) has gained 11.5%. During last year’s
unfavorable six-month period, by contrast, the Dow lost 0.9%. The year before that saw a 10.5% gain during the
winter months and a 6.7% loss during the summer months.
To be sure, the pattern hasn’t always worked out this well. But it has far more often than not: Over the past 50
years, the Dow on average has produced a gain of 7.5% during the winter months and lost 0.1% during the summer
The “sell in May” pattern also exists in other countries besides the U.S. Ben Jacobsen, a finance professor at
Massey University in New Zealand, reached that conclusion after studying all available historical evidence from
each of 108 separate stock markets around the world. For example, his statistical tests detected the seasonal
pattern in the United Kingdom stock market as far back as 1694.
Jacobsen, in an interview, emphasized that the Halloween Indicator isn’t merely the product of a shameless,
after-the-fact data-mining exercise. He said that he found an article as long ago as 1935 — in the Financial Times
— in which the “sell in May” pattern is referred to as something that was already well known and followed.
Even though the pattern nearly 80 years ago already had a solid historical foundation, Jacobsen notes, since
then the difference between the average returns in winter and summer has become even bigger.
This is a crucial point, he argues, since the all-too-usual tendency is for patterns to begin to evaporate once
investors become aware of them and try to exploit them.
The most obvious investment implication of this seasonal pattern is to liquidate your stock portfolios at the
end of this month and sit comfortably — if unexcitedly — in cash for six months. Because the stock market doesn’t
always produce disappointing returns during the summer months, however, you might want to dedicate just a portion
of your equity portfolio to following this market-timing strategy.
There might be another way to follow it without going to cash. Jacobsen reports that the “sell in May” seasonal
pattern is most pronounced among those U.S. stock-market sectors that focus on manufacturing and production, and is
“almost absent” in sectors such as consumer goods, financial services, technology and telecommunications.
He told me that a hypothetical portfolio would have beaten a buy-and-hold by 3.3 percentage points per year over
the past decade by investing during the winter months in the sectors for which the Halloween Effect is strongest,
and switching in the summer months into those for which the pattern is nearly absent.
Exchange-traded funds provide an easy and inexpensive way to gain exposure to each of these sectors. IShares has
offerings that are benchmarked to the various Dow Jones indexes for these sectors: the iShares Dow Jones U.S.
Consumer Goods Sector Index Fund (NAR:IYK) , the iShares Dow Jones U.S. Financial Sector Index Fund (NAR:IYF) , the
iShares Dow Jones U.S. Technology Sector Index Fund (NAR:IYW) and the iShares Dow Jones U.S. Telecommunications
Sector Index Fund (NAR:IYZ) . Each has an expense ratio of 0.46%, or $46 for every $10,000 invested.
You also might not want to wait until May Day to make these portfolio changes, according to Jeffrey Hirsch of
the Almanac Investor Newsletter and Sy Harding of Sy Harding Investor Forecasts. Both advisers, who are among the
many tracked by Hulbert Financial Digest, maintain a model portfolio that attempts to exploit the “sell In May”
They argue that if the stock market’s shorter-term trend turns down in the weeks leading up to May Day,
followers of this seasonal pattern should sell immediately rather than waiting until the beginning of May. To the
extent they are successful, they will improve on the already stellar returns of the original version of the “sell
In May” pattern.
The key, of course, is in correctly identifying that shorter-term trend. Hirsch believes it already has turned
down, and therefore has sold many of the positions in his model “sell in May” portfolio and instructed clients to
sell remaining equity holdings if they fall very much from current levels.
Harding, in contrast, is still giving the market the benefit of the doubt. But he says that, as May Day
approaches, he will be increasingly inclined to sell at the first sign of market weakness.
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