Sell In May Pattern Looks to Hold True

As we head in to Memorial Day weekend the S&P 500 index is down around 6% in May. If we close out next week in the red then the 'sell in May' trading pattern will have held true for 4 out of the last 5 years. 

While that is notable, what most investors care about is what's coming next.

Based on historical data from Charles Schwab, we should expect a lull until Labor Day then a slight boost in stocks through the end of the year. Randy Frederick, Schwab's Managing Director of Trading and Derivatives, recently stated that from 1950 through 2011, the S&P 500 posted an average return from Memorial Day to Labor Day (68 trading days) of about 1.1%. That's our summer lull, which in all actuality doesn't sound too bad.

The expected fall boost should come next. Mr. Frederick also stated that in an election year, in 12 of the last 15 instances, the market has returned a positive election year return, averaging 6.6%.

Given that we're nearing the end of the sell in May phenomenon, and that the S&P is posting YTD return of just over 3%, one should expect a 2.5% rise in stocks after Labor Day.

Of course there are all sorts of caveats to trading based on historical patterns. But taking a high level view it appears that the sell in May phenomenon has created a buying opportunity in 2012.