June 4, 2008

• The Sell in May and Go Away strategy of going to cash on May 1 and then reinvesting in the market on October 31 (the worst six months)  has worked – on average – over the last half century because of a dozen-or-so Autumn crashes that have skewed the historical context.
• The average loss of the worst six months has been -1.3%.  That decline has, on average, followed a 10.0% gain from November 1 to April 30 (the best six months).  This last cycle of the best six months, in contrast, experienced a decline of 8.1% – a greater than eighteen percentage point differential.
• There are several other data points that are more appropriate given their timeliness (Presidential election year, a recession year, the end of a Fed easing cycle) that portend better times for the stock market for the next few months. 

We have had a few client inquiries regarding the market-timing theory of “Sell in May and Go Away”.  The thought behind that adage is that over the last half-century virtually all of the stock market’s gains have occurred over the six-month period from November 1 through April 30.

In contrast, the six-month period from May through October has, historically, done very little in adding to stock market gains.  Much of this “averaged truth” has more to do with some outsized crashes in Autumns passed than with some level of consistency (think October 2002 capitulation, September 1998 Asian Contagion, October 1987 Black Monday, the 1974 crash, etc).  According to the Stock Traders Almanac, since 1950 through 2006, the six-month period from May 1 – October 31 has seen the stock market up 29 times and down 28 times (up about half the time), with an average loss of -1.3%.

And while we are a month late in writing the seemingly mandatory Sell in May article, we thought it would still be timely (and hopefully informative and interesting) to note some other historical data points that contrast the Sell in May strategy.

• Since 1950, during Presidential election years, the stock market has been up during the period of June through October every time, except one.  That is a 92% accuracy rate.  The average return has been 3.81%; that would put the S&P 500 at 1,453 points on October 31.
• The market has an election-year tendency to rally after May into September (longer if the incumbent party wins).
• March 10th marked the low for the stock market during this recessionary period at 1,273 points.  Over the last ten recessions the S&P 500 has been up from that low 63-, 126-, 189-, and 252-trading days later to the tune of 15.8%, 24.1%, 32.2%, and 32.4%.  That would put the S&P 500 at 1,474 points today and at 1,579 points by September 3rd and 1,682 points by December 2nd.
• The date of April 30th, with the S&P 500 closing at 1,385 points, most likely marked the end of the Fed’s easing cycle.  Since 1954, from the last cut date of a Fed easing cycle the stock market has been up a median of 3.9%, 8.2%, and 17.6% in the subsequent 63-, 126- and 252-trading days.  That would put the S&P 500 at 1,439 points by the end of June and at 1,498 points by October 29th.

These bullet points of data, neither by themselves or separately, should be used as an endorsement of the stock market for the next three-to-five months.  They do, however, offer some historical data points that should offset the spookiness of the Sell in May and Go Away strategy.  Also, they do offer a historical context that supports our forecast of a stronger stock market in the final two-thirds of the year than we experienced in the first third.

Additionally, the worst six months has followed an average gain of 10.0% in the best six months.  But this time around, the typically strong six months actually saw the market drop 8.1%.  That is a statistically significant eighteen percentage point differential.  I would, perhaps, dare say that often lamented phrase “this time it is different”, but remember, half the time (29 up periods vs. 28 down periods) the stock market actually goes up during “the worst six months”.