Saturday, May 30, 2009

Sell in May? A Follow-up

At the beginning of May, I wrote a post questioning the validity of the old trader's axiom of Sell in May. Although it's a widely-held truism, the previous 29 years of market action in May reveal the exact opposite to be true.

With May 2009 in the books, the contradiction has extended itself.

The NASDAQ has now closed higher in May a remarkable 20 out of the past 30 years -- a 66% occurrence rate since 1980. The SPX has done even better, with a positive close in 21 of the past 30 May cycles (70%).

The streak has strengthened in recent years. Since the 2002 bottom, the NASDAQ has climbed in May six of the past seven years. The gains are statistically significant as well. Since 1980, the average May for the NASDAQ is +1.87%; for the SPX it's +1.51%.

However, despite this track record, predictions of May weakness are trotted out each year as part of the established canon of trader wisdom.

Why the discrepancy?

Perhaps the biggest reason is that Sell in May is the opening gambit in a longer seasonal trading strategy known as the Halloween Indicator. Part of trader lore for generations, in July 2001, Sven Bouman and Ben Jacobsen examined the financial markets of 37 countries, some as far back as 1694. They established that, across three centuries and multiple economies, winter has produced better market results than summer.  So, for 300 years, selling in May and buying back in after Halloween has produced better returns.
The point here is that for 30 years dumping stocks in May has reduced these seasonal returns, and it's a fact inexplicably unnoticed by trading mavens, the mainstream press and the blogosphere alike. For example, in Oct 2007 Mark Hulbert -- normally excellent with these types of observations -- considered ways of improving the Halloween Indicator. However, Hulbert focused on MACD confirmations and never mentioned May performance. This year, Hulbert insisted that the Halloween Indicator remains strong, while again neglecting the May anomaly. It will be interesting to see when the investing community finally recognizes that Sell in June is the better rule of thumb.

It's important to understand that, by their own admission, Bouman and Jacobsen could never establish why financial markets outperform in winter. Looking ahead, it's possible that globalization and the 24/7 interconnection of world economies could impact this centuries-old market pattern to an even greater degree.

As I write, the profitable winter season is just three weeks away  -- in Brazil, Australia, Indonesia, South Africa and every other market south of the equator.

Time to sell?

Saturday, May 02, 2009

Sell in May?

Is May really a good time to sell?

I looked at the past twenty-nine May trading periods on the NASDAQ -- from May 1980 to May 2008. Surprisingly, the NASDAQ closed higher during the month of May a very respectable 19 out 29 times -- a 66% occurrence rate.

Even more interesting, since the Dotcom bottom, the occurrence rate of a positive May close accelerated to 83%. The NASDAQ has posted gains in five of the past six May trading periods.

The result is that in the 29-year sample, the average NASDAQ performance in May was actually a gain of 1.82%.

So much for old wives' tales.

It's worth noting that, up or down, the average moves were statistically significant as well. During the years that the index moved up in May, the average gain was 4.99%. During the years the NASDAQ fell, the average May loss was -4.21%.

The SPX produced similar results. Since 1980, the SPX closed higher in May 20 out of 29 times -- one year better than the NASDAQ! The average SPX performance in May for the past 29 years has been a respectable gain of 1.38%.

The bottom line is that, on average, the market moves higher during most May trading periods. When it does, the moves tend to be a big ones as well. When the market moves lower in May, it's usually a hefty tumble.

Will the stock market close higher in May 2009? It's impossible to know, but a seasonal wives' tale isn't the place to look for answers.

Investing is so complex that there is a natural tendency to try and simplify the process. The problem with simplification is that, by its very nature, it distorts the data. In the case of salty trading yarns, this distortion can produce completely erroneous interpretations.

So maybe it's Sell in June?

The most reliable advice is probably the most useful epithet of them all:

Trade what you see, not what you think.

Good luck trading.



NASDAQ Historical Performance in May
May 1980 -- 7.47%
May 1981 -- 3.11%
May 1982 -- (3.34%)
May 1983 -- 5.35
May 1984 -- (5.91%)
May 1985 -- 3.65%
May 1986 -- 4.41%
May 1987 -- (0.30%)
May 1988 -- (2.34%)
May 1989 -- 4.36%
May 1990 -- 9.26%
May 1991 -- 4.41%
May 1992 -- 1.15%
May 1993 -- 5.91%
May 1994 -- 0.18%
May 1995 -- 2.44%
May 1996 -- 4.44%
May 1997 -- 11.07%
May 1998 -- (4.80%)
May 1999 -- (2.84%)
May 2000 -- (11.91%)
May 2001 -- (0.27%)
May 2002 -- (4.30%)
May 2003 -- 8.99%
May 2004 -- 3.46%
May 2005 -- 7.63%
May 2006 -- (6.19%)
May 2007 -- 3.15%
May 2008 -- 4.55%

29-year avg = +1.82%