Sell in May and Go Away: Does It Have a Good Track Record?

“Sell in May and Go Away” is a popular investment strategy based on the idea that stock markets underperform during the summer months. The adage suggests that investors sell their positions in May and refrain from re-entering the market until the fall, typically around October. This approach has gained traction due to historical seasonal patterns of reduced trading volumes, lower returns, and higher volatility during this period. While this perspective has some value, the facts vary — that’s why we’re looking at the numbers in the complex economics of modern-day trading.

Read this article to learn the truth behind the “Sell in May and Go Away” strategy, so you can decide if it fits your trading approach.

I’ll answer the following questions:

1. What does “Sell in May and Go Away” mean?
2. How does the “Sell in May and Go Away” strategy compare to a buy and hold approach?
3. What is the historical track record of the “Sell in May and Go Away” strategy?
4. What are the origins and logic behind the seasonal strategy?
5. How can stock traders implement the “Sell in May and Go Away” strategy in their trading plan?
6. What are the advantages and disadvantages of the “Sell in May and Go Away” strategy?
7. What are common mistakes to avoid when using this strategy?
8. Is it worth trading using this strategy?

Let’s get to the content!

What Does “Sell in May and Go Away” Mean?

The “Sell in May and Go Away” strategy is based on the idea that assets’ price performance weakens from May through October compared to the other half of the year. It suggests that traders and investors should sell their stocks in May to avoid the anticipated lower returns of the summer months and then buy back into the market later in the year. The strategy aims to reduce exposure to the market during a perceived period of lower profitability and higher risk.

The specific timeframe of this strategy covers six months, during which investors are advised to take the following actions:

1. Sell Positions in May: Close out long positions in stocks, ETFs, and other securities as May begins.
2. Stay Out of the Market: Refrain from making significant new investments from May to October.
3. Re-enter in the Fall: Buy back into the market around October, positioning for the traditionally stronger period from November to April.

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The Origins and Logic Behind the Seasonal Strategy

The “Sell in May and Go Away” strategy has its roots in historical market patterns observed in Western stock markets, particularly in the UK and the US. This adage originated from an older English saying, “Sell in May and go away, and come back on St. Leger’s Day,” referencing a horse race in mid-September, which highlighted how people, including traders, would take time off during the summer, leading to reduced market activity. The reduced trading volume during these months often resulted in lackluster market performance, which fueled the logic behind the strategy.

• Lower trading volumes in summer months often lead to increased volatility and unpredictability.
• Institutional investors, including hedge funds and asset managers, tend to reallocate resources during the summer, impacting market liquidity.
• Economic factors such as weaker corporate earnings reports and reduced business activity also play a role in the seasonal decline of market performance.

How the Strategy Compares to a Buy and Hold Approach

Compared to a buy-and-hold approach, the “Sell in May and Go Away” strategy can sometimes outperform by avoiding summer downturns, but it also misses potential gains during periods when markets defy seasonal expectations. Buy and hold strategies focus on long-term growth, ignoring short-term market fluctuations, which allows investors to benefit from the compounding effect over time. In contrast, the seasonal approach seeks to time the market, which adds an extra layer of risk due to the unpredictability of short-term market movements. For those who’ve stuck to buy and hold, the rewards have historically outpaced any potential benefits gained from selling in May, as they capture both the dips and the rallies.

• Historical data shows that between 1928 and 2020, the S&P 500’s November-April period outperformed May-October significantly.
• During some years, the summer months have seen unexpected rallies, negating the strategy’s intended risk reduction.
• Graphs comparing cumulative returns show that buy and hold typically delivers higher long-term gains, despite the seasonal lows.

The Sell in May and Go Away Track Record

The historical performance of “Sell in May and Go Away” has seen mixed results. There have been periods, particularly in the 1980s and early 2000s, where the strategy seemed to offer an advantage by avoiding significant market downturns. However, recent data points to a less reliable outcome, with many summer months showing solid gains that defy the strategy’s premise. While there are notable years where the market’s decline during May to October would have justified selling early, these instances are often followed by years where staying invested would have been more profitable.

1. Performance in the 1970s and 1980s: The strategy performed relatively well, avoiding downturns during oil crises and periods of high inflation.
2. 1990s Boom: During the tech boom, the strategy often missed out on critical summer rallies.
3. Post-2000s Analysis: From 2010 to 2020, staying invested during summer months often outperformed going to cash, showing the diminishing relevance of the old adage.

The “Sell in May and Go Away” strategy focuses on avoiding potential downturns in investing. Another key concept is understanding alpha in your investments. Alpha represents the performance of your portfolio relative to a benchmark, reflecting the value added by your trading strategy. If your approach has a track record of beating the market, you’re generating positive alpha, which is the ultimate goal for any investor. Comparing this strategy with a buy-and-hold approach can help you gauge whether you’re truly adding value or just following seasonal patterns.

To explore how alpha works in stock trading, check out this guide.

Is It Worth It to Trade Using This Strategy?

The only way to decide if a strategy works for you is by checking

• Advantages:
  • Reduces exposure to historically weaker market months.
  • May help avoid periods of high volatility and lower returns.
  • Aligns with periods when professional traders and large institutions are less active, potentially reducing competition.
• Disadvantages:
  • Misses out on gains during unexpectedly strong summer periods.
  • Market timing risks can lead to lower overall returns if re-entry points are mistimed.
  • Relies on historical patterns that may not be as relevant in modern, fast-paced financial markets.

Before adopting this strategy, stock traders should consider their overall investment goals, risk tolerance, and the current economic landscape. Seasonal trends are just one aspect of market behavior, and relying solely on a calendar-based approach can leave you vulnerable to missing out on gains during an otherwise favorable market. Always weigh the potential rewards against the inherent risks of trying to time the market based on past patterns that may not repeat.

For seasonal strategies like “Sell in May and Go Away,” you need to understand how your buying power is affected. Knowing the difference between overnight and intraday buying power can help you manage your trades better during these months. Overnight buying power is usually less flexible, requiring more margin, while intraday buying power allows for more frequent trading within a day — as long as you’re over the PDT. Being aware of these differences can help you align your strategy with your available resources.

To learn more about managing overnight versus intraday buying power, check out my guide here.

Key Takeaways

• “Sell in May and Go Away” is a seasonal strategy based on historical underperformance during summer months.
• The strategy’s effectiveness has varied significantly across different market conditions and decades.
• A buy-and-hold approach generally outperforms over the long term by capturing full market cycles.
• Understanding the historical context and data is essential before deciding if this approach fits your trading style.
• Always incorporate other indicators and market analysis when considering this strategy.

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Frequently Asked Questions

What Are the Best Months to Sell Stocks According to Data?

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Data suggests that May to October are traditionally weaker months for stock market performance, particularly in Western markets. Seasonal factors, reduced trading volume, and slower business activity contribute to this pattern, making these months a common exit point for cautious investors. However, it’s important to consider current market conditions as trends can vary significantly year to year.

How Can Stock Traders Implement the “Sell in May and Go Away” Strategy in Their Trading Plan?

1. Plan Exit: Set specific exit points for stocks and other securities in early May, ideally after earnings season.
2. Monitor Market News: Keep an eye on economic indicators and market news to adjust your re-entry timing in the fall.
3. Reassess in October: Evaluate market conditions in October to determine if it’s the right time to re-enter, based on data and technical indicators.

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What Common Mistakes Should Be Avoided in Long-Term Trading?

Long-term trading is often compromised by mistakes like neglecting a proper risk management strategy, failing to diversify, and holding on to losing positions due to emotional attachment. Traders frequently overestimate their ability to predict market movements and underappreciate the importance of staying the course during temporary downturns. To minimize these errors, establish a robust risk management plan that includes setting stop-loss levels, diversifying your portfolio across different asset classes, and avoiding the temptation to chase hot trends without substantial research. Adhering to these principles can help protect your capital and improve long-term trading performance, keeping you aligned with your financial goals.

How Does “Sell in May and Go Away” Apply to ETFs?

“Sell in May and Go Away” can also be applied to ETF trading strategies, particularly those tracking broad market indices. By exiting ETF positions during the summer months, traders aim to avoid periods of historically lower returns. However, the effectiveness of this approach depends on the specific ETF and market conditions, as not all asset categories experience the same seasonal patterns.

Do Companies’ Performance Justify the “Sell in May” Strategy?

While the strategy suggests businesses underperform during the summer, company performance varies significantly and is not solely dependent on the calendar. Some companies, especially in sectors like travel and retail, may see stronger earnings during this period. Therefore, using “Sell in May and Go Away” without considering the specific economic situation of individual companies can lead to missed opportunities.

What Statistics Support the “Sell in May” Strategy?

Statistics supporting the “Sell in May and Go Away” strategy often highlight weaker average returns during the summer months compared to the winter months. However, these results are averages and do not guarantee similar performance every year. Traders should consider this historical information as one piece of their overall strategy rather than a definitive guide.

What Are the Main Reasons Investors Follow This Strategy?

Investors often follow “Sell in May and Go Away” due to the perception of lower returns, higher volatility, and reduced market activity during the summer months. The strategy aims to minimize risk during a period traditionally viewed as less profitable. However, these reasons are based on historical data and may not always apply in the current market environment.

How Does Economic Commentary Influence the Strategy?

Economic commentary from analysts, authors, and finance experts often influences investor sentiment around the “Sell in May and Go Away” strategy. Articles, opinions, and research shared on platforms like LinkedIn and financial news sites can sway traders’ views on whether this approach is valid in the current market. Staying informed through reliable sources helps traders make decisions that align with their own risk tolerance and investment goals.

What Are the Privacy and Disclaimer Concerns When Reading Financial Articles?

When reading financial articles that discuss strategies like “Sell in May and Go Away,” it’s important to consider privacy choices, disclaimers, and potential biases. Many sites, especially those that offer compensation or affiliate partnerships, may have financial incentives that influence the content. Always review disclaimers and privacy information to understand the context and potential conflicts of interest before making trading decisions.

What Role Do Partnerships and Affiliates Play in Promoting Investment Strategies?

Partnerships and affiliates can play a significant role in promoting strategies like “Sell in May and Go Away” through various finance platforms and commentary sites. Financial websites may collaborate with authors or other businesses to offer products, compensation, or special offers that align with seasonal trading advice. Understanding the motivations behind these promotions can help investors critically assess the information presented.

Why Does “Sell in May and Go Away” Start on May 1?

The strategy traditionally begins on May 1 as this marks the start of the period where markets have historically shown weaker performance. This date is symbolic rather than precise, as market dynamics can shift from year to year. Investors use this timing as a general guide, but should always evaluate the current market situation before making trading decisions.