A longstanding adage among traders is to “sell in May and go away.” The phrase is based on an even older British adage of “sell in May and go away; don’t come back until St. Leger Day.” The strategy calls for avoiding stocks during the summer months. While the British adage suggests buying stocks after the September St. Leger Stakes horse race takes place, the American strategy suggests waiting until the start of November.

The strategy of holding stocks between November and April and avoiding them between May and October was first discussed in an academic journal in 2002 by Ben Jacobsen and Sven Bouman. The study confirmed the existence of the “sell in May” effect in many country-specific indexes. Since its publication, many follow-up studies have been published supporting the anomaly’s existence in many, but not all markets and indexes.

Questions have arisen as to whether the attention given to the strategy has hurt its returns. Two German researchers looked at the returns for the Dow Jones industrial average and its underlying components to determine whether this is the case. Their analysis covered the period of January 1989 through August 2016.

Over the full period, following the Sell in May strategy realized an economic benefit of 1.04% per month over the full analysis period. When the data was split between subperiods of January 1989 through December 2002 and January 2003 through August 2016, the effect was considerably smaller in the second, more recent period than in the first period.

Part of the decline in performance may be due to January. Attention given to the pattern of stocks performing better in January (aka the January effect) may have helped contribute to the lower returns in January during the second subperiod relative to the first. To the extent January has been weaker, the benefit of buying and holding during the best six months (November through April) is diminished.

There are a few other things of note from the study. The basic materials and industrials sectors were found to perform better during the winter months than in the summer months. Using leverage only during the winter months could boost returns, but the authors say it is difficult to determine the correct amount or type of leverage to use without the benefit of hindsight.

Source: “The ‘Sell in May’ Effect: A Review and New Empirical Evidence,” Thomas Degenhardt and Benjamin Auer; North American Journal of Economics and Finance, January 2018.

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