May

10

Lately I have seen a lot of "sell in May" analysis with this being a good example:

Chart of the Day: Sell in May S&P 500

So I looked at all SPY years and calculated the returns for two periods: (1) "summer", end of May to end of October, and (2) "winter", end of October to end of May:

For owning "summer", $100 became $186.
For owning "winter", $100 became $790.

Seems like a clear victory for "sell in May", except for what they always leave out: buy and hold over the whole period turns $100 into $1474.

H. Humbert adds:

It's obviously a much more ridiculous idea if you consider capital gains taxes, which would be short-term if you truly buy and sell for the winter.

Jeffrey Hirsch replies:

Issued my Best Six Months MACD Sell Signal on April 25 for Dow and S&P. Everyone gets so hyper focused on "sell in May", they forget to "buy in October and get themselves sober," as I like to say.

I tweeted on this last week.

Larry Williams provides perspective:

Never forget: Prior to 1950's best was to buy in may to make some hay….Long gone but once in the data.

Jeffrey Hirsch responds:

Thanks for the Reminder Larry! So true. Here's the chart I use to make that point:

Steve Ellison writes:

For any seasonal pattern, I ask, "Who is the sucker at the table who will buy too high at one time and sell too low at a different time?" And do said suckers have a reason to continue their behavior into the future? The late Mr. E said that a lot of money flows into the stock market at the beginning of a new calendar year as, for example, high-income people who maxed out their 401(k) contributions the previous year can resume.

There was an annual cycle of profitability at the multinational technology company where I worked for 20 years; conveniently, their fiscal year end of October 31 aligned exactly with the Best/Worst 6 months thesis. First quarter, ending in January, was usually strong as it included both the Christmas season and the end-of-year "budget flush" in which corporate managers had to spend any surplus lest their budgets be cut the next year. Second quarter, ending in April, was also usually strong.

Third quarter, ending in July, tended to be a bit weaker as summer started. Fourth quarter, ending in October, was a mixed bag as back-to-school selling season was offset by European businesses mostly shutting down in August. But with commissions and bonuses on the line, the sales force would work 24/7 in the second half of October to close deals and bring in a strong quarter.

Additionally, with third quarter results being reported in mid-August while Wall Street was in the summer doldrums, the company was disproportionately likely to report any major writeoffs or other bad news in the third quarter.


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