‘Sell in May’ stock strategy true so far
Old saying can pay off for investors who stick with it – theoretically
NEW YORK — On April 3, weeks before May kicked off what historically has been the market’s worst six-month stretch, Jeff Hirsch, editor of the Stock Trader’s Almanac, issued his annual “Sell in May and Go Away” sell signal.
Hirsch’s recommendation to reduce risk was prescient. He based his bearish call on the fact that the stock market had run up 25% since its October 2011 low, was nearing the end of its strongest seasonal period and was losing momentum.
His timing was spot on. The Dow Jones industrials began tumbling on cue, peaking on May 1 before retreating. In May the Dow has fallen 6% to 12,420 and has suffered losses 16 of 21 sessions, including Wednesday’s 161-point drop.
And with June a day away and five months before the market’s best sixmonth stretch kicks off in November, Hirsch is sticking to his calendar-centric call: “My advice is to stay cautious, get defensive.”
With risks rising due to the deepening debt crisis in Europe, uncertainty surrounding the November U.S. elections and a still-weak economy, Hirsch is urging clients to seek havens, such as funds that invest in long-term U.S. government bonds. He is also recommending “bear” funds, which profit when stocks fall.
The Almanac is best known for identifying quirky seasonal trading patterns. When it comes to turning a profit for investors, few, if any, are as statistically successful as its “Best Six Months Switching Strategy.”
The system is simple: Basically, invest in the Dow from Nov. 1 to April 30. Then switch into more conservative fixed-income funds for the other six months. The investment results are eye-popping. Since 1950, a $10,000 investment in the Dow in the worst six months would be worth just $6,724, vs. the $1.88 million that would have been made in the bullish six-month period. In the two most recent bullish periods from November to April, the market enjoyed gains of 11.6% and 15.2%, while the worst six-month stretches saw losses of 8.1% and 0.3%.
What causes the performance discrepancy? The bearish period includes the normally slow summer period when buying activity is lower. (Statistics, however, show that the summer months are bullish during election years.) The bullish months benefit from year-end bonus season, taxreturn season and early-year buying by optimistic fund managers.
Brian Belski, chief investment strategist at BMO Capital Markets, says making “wholesale portfolio changes” based on seasonality is “dangerous.” While the math may add up on paper, it’s unlikely to be a winning strategy in the real world because investors lack the discipline to get in and out as required.