Tuesday, May 5, 2015

Let's Talk About Sell in May and Go Away...

The first couple days of May have definitely been an extension of the months long choppiness that has come to personify the market.  This from Jeff Saut's (Raymond James) weekly investment strategy note yesterday:

...I have seen a lot of folks attempting to trade this market over the past few months all to no avail. What has typically happened is that one day they are able to make some money, but the next day they give that profit back. Dougie (Kass) even tweeted on this by noting, “The market has no memory day to day!” I have not gone back and counted, but my sense is that over 50% of this year’s sessions have seen 100 point daily swings in the D-J Industrials (INDU/18024.06) with one day being up and the next day being down. If you can trade that successfully, you are a better trader than I am, which is why I have not attempted to trade this market all year. Clearly, sometimes me sits and thinks, and sometimes me just sits! As my friends at the sagacious Bespoke organization wrote Friday morning: “As of yesterday’s close, the S&P 500 has essentially not changed since the closes on: 4/17, 3/30, 2/12, and 12/24. What’s more, 19 of the 88 trading days since 12/23 have seen a tick that included yesterday’s closing price. US equities are on a treadmill thus far in 2015, with year-to-date gains of 1.3% for the S&P 500 hiding a very persistent sideways move.."
As we sit here in no-man's land waiting for the market to resolve itself, we've been left with plenty of time to run even more studies, scans and scenarios.  One such area that we quickly covered was seasonality and, yes, that included the oft-quoted "Sell in May and Go Away" mantra that pops up around this time every year.  
The idea behind the "rule" being that May kicks off a 6-month seasonal period that has historically been weak for stocks and investors should not expect much in the way of gains.  And if you break the calendar down into two 6-month periods (May-October and November-April), the data does support the idea.
In one study, we started in 1995 looked at the S&P 500's performance in every month for the two periods.  The results in the table below show that the index's average performance in the May-October months (0.16%) has been considerably lower than the November-April period (0.92%).  The May-October months also sport a much lower reward/risk ratio, 1.09 vs 1.81.

We also looked at May through October on an individual month basis.  While the overall picture of this period during the last 20 years has lead to basically flat returns, certain months stand out in terms of strength and weakness.  June, September and particularly August have been the historical losers while May and October have offered the best statistical chance for gains.

We're not going to recommend that anyone invest based on solely on seasonal patterns but you could've had worse strategies over the last two decades that's for sure.

Ryan Worch is the Managing Director of Worch Capital LLC. Worch Capital LLC is the general partner of a long/short equity strategy that operates with a directional bias and while emphasizing capital preservation at all times.

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