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Financial markets aren’t off to a very good start this month. Through the first seven trading days in May, U.S. stocks have fallen 2.5%.
To those who trade the historical trends, this is nothing new. It’s known as the “Sell in May, Go Away” phenomenon. The theory goes that the summer months are traditionally the weakest stretch for the financial markets, so it’s wise to sell all your shares in May before stocks go into six-month hibernation.
Not everyone buys into the theory, of course. Some say it’s a myth, and completely depends on the year. And there is undoubtedly some truth to that.
But my trusty Stock Trader’s Almanac reveals that the “sell in May” theory does have some merit. Since 1950 the Dow Jones Industrial Average has lost just under 800 points from May through October, while the S&P 500 has fallen 12.6 points. From November through April, the Dow has gained 13,395 points while the S&P has gained 1333 points.
Recent history supports the theory as well. Stocks fell off a cliff last summer, reaching their nadir on October 3. They then went on a furious four-and-a-half month rampage starting in late November and lasting through the end of April. Now that the calendar has turned to May, the sell-off has begun in earnest.
There have been exceptions to the “sell in May” theory. The Dow gained 19% from May through October in 2009, while gaining only 13.3% the other six months. In 2007, the Dow gained 6.6% from May through October and declined 8% from November through April. Another exception was 2003, when May-October gains were 15.6%, nearly four times the 4.3% gains November through April.
Since the turn of the century, the May-October period has only outgained the November-April period four times. Through 2010, the average gain for the Dow between November and April has been 5.8%. From May through October, stocks have basically been flat.
That’s a pretty substantial difference – and one that certainly supports the “sell in May” theory. But there have been very pronounced exceptions to the theory, including as recently as 2009.
So while a sell-off has ensued this May, there’s no guarantee it will last until November. But the numbers suggest there’s a good chance it will.