Sell in May, Buy Back in November. Fact or Fallacy?

Q. Should you sell in May and go away?


A: Most stock market traders have heard of the old saying 'sell in May and don't come back till St Ledger Day' or 'sell in May and go away'. But it's not about having fun in the sun. It's a timing strategy that basically says it's better to be in the market for only half the year and sit out the rest of the time. But does it work?

This saying may be a cliche but it may hold some truth according to John Mauldin from Investors Insight. For instance between 1950 and April 2009, the November-April period has performed better than the other 6 months of the year. In an average year, the winter has produced a total return of 7.9%, compared with 2.5% for the summer months. However, since 1950, stocks in the United States have been through two long term bull runs (one around 1950-1966 and the other 1982-1999) and two bear markets (1966-1982) and an ongoing one that started in 2000). Looking at the seasonal pattern in the bear in the bear phases (so 1965 - 1982 together with 2000 - April 2009) it is interesting to note that the May-October period is particularly 'ugly'. The average return over this period is -0.3%, compared with 4% in the winter time.

Q. Should I buy in November?

A: Just like the old adage urges investors to sell in May, it also tells them to come back in November. But how true is this clique? Well, forgetting the cold and wetter weather, November appears to be one of the better months when it comes to investing in shares. For instance, historically the S&P 500 trades at its best in November while for the USA Nasdaq index it is the second best month; statistics simply show that November tends to be a period when shares gain.

Since 1950 the USA indices appear to have a tendency to rally in the period from November to May while the period from May to November has somehow underperformed compared with the other half of the year. Solid research does show that in the past decade the Dow and S&P 500 have experienced 7 monthly rises while ending with a loss for the month just 3 times in the years 2000, 2007 and 2008. A problem is that the 7 good years averaged gains of 3.4% while the 3 poor years experienced losses of 4.6%. For the S&P, losses were even more accentuated at 6.3% for the bad years compared to an average gain of 3.8% for the better years. This seems to imply that in a bear market phase the November losses can be substantial and it is especially important to make use of stop loss orders in your November trades to counter this. However, it worth noting that a good November trading period is more likely to continue leading into gains in December and the beginning of next year...

Certainly there is a substantial number of investors who follow the rule of selling in May and getting back in November which may help to make circumstances something of a self-fulfilling prophecy. And of course November brings with it a 'feel good' factor as Christmas approaches which tends to make people more willing to buy something as opposed to selling it. Of course there is no guarantee that the historical trends will keep holding every year so you should not just follow this rule blindly... Having said all that spread betting does makes it very easy to trade this famous 'November-May' strategy as you can dip into the USA indices like the Dow Jones and S&P 500 or simply by betting on individual shares without the need of separate dollar account, as spread betting is just executed by specifying your pound amount per 1 cent move in USA stocks.

 ...Continues here - Making A Good Income Spread Betting from a Small Pot?

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