Starting in April of each year, professional and retail Investors ask themselves "should I sell in May and go away"? Although many point to Stock Trader's Almanac statistics that illustrate the stock market's tendency to provide lower returns in the period between April and October, the explanations behind the phenomenon are often missing. Market statistics only show what happened in the past, they don't provide any explanation of why the event occurred.
Calendar effects, such as "sell in May and go away", are not uncommon in the stock market. Such trends can be seen at the end of the year with the "Santa Claus rally", beginning of the year with the "January effect" and every few years during U.S. election cycles. Despite the fact that some market participants deem these market timing concepts (or adages) as credible, academia does not.
The concept of "sell in May and go away" contradicts established market philosophies such as Efficient Market Theory. As academia shifts towards the study of behavioral finance these calendar effects may be justified through psychological concepts such as herd behavior. This type of behavior can be characterized by the tenancy of individuals to act collectively and to mimic the actions of a larger group. So if we think that the group is planning to sell their positions in May, why shouldn't we follow the herd?
If the masses believe a May sell off will occur, it will. If the market has more sellers than buyers, the market falls. The falling market will trigger other market participants to sell their shares. Given our tendency to anticipate a May sell off, we sell our shares (or at least raise our stops to lock in profits). In my opinion, this is how adages concerning market timing become self-fulfilling prophecies.
Should I Sell in May and Go Away, or Not?
Making the decision to lighten your exposure to equities should be based on your financial plan. First, understand or remember why you are investing in the first place. If you are trading, the decision to exit a positions should be based on price action of the asset, not time of year. Your trading strategy (entry and exit points) should dictate the time to sell. In addition, if you are a long-term investor whom is seeking capital appreciation to fill financial planning gaps you should avoid the temptation to sell during short-term stock market fluctuations. In simple terms, just stick to your original plan.
In the past five years there were only two periods in which stocks were lower in September then they were in April. Thus selling in May and going away until October would not have been wise. In hindsight, it would have been better to maintain your current stock positions, and added to them during the summer sell-off. The two "May sell-offs" are annotated by the red boxes in the following chart:
In summary, the decision to sell or lighten stock positions should be based on price action and macro-economic assessments. While statistics do support a "sell in May and go away" approach, it's not significant enough to warrant the blind abandonment of positions. Take these anticipated calender driven stock market events with a grain of salt. Stick with your financial plan, keep your eyes open for changing trends and adjust as needed.