According to Business Insider, based on analyses of average market performance by month over the past 50 years, stocks underperform in the six-month period from May through October when compared with the period from November through April.

Chartered Market Technician (CMT) and Founder and President of Eagle Bay Capital, J.C. Parets says, the "Sell in May" aphorism is a good one and well worth heeding. He points out that The Hirsch family publishes the Stock Trader's Almanac and touts what it calls "The Best Six Months" strategy. The almanac makes a compelling argument. Over the last 60 years, the Dow Jones Industrial Average has made all of its gains between Nov. 1 and April 30. According to the almanac, a $10,000 investment in 1950 compounded to $527,388 for November through April compared with a $474 loss for May to October.

The Hirsch statistics only went through 2009, but Parets notes the trend continued through October 2011. In the six-month span from November 2009 through April 2010, The Dow was up 1,295 points, or 13.3%. From May 2010 through October 2011, the Dow was up just 109 points, a little less than 1%. By this reckoning, the case is made for "Sell in May – Go Away."

Naysayers, however, point out that what seems simple rarely is. It is when those neatly packaged statistics are broken down, that problems begin to appear. Business Insider, for example, notes that in the six-month period beginning in May, the month of May, while weak, has been positive nonetheless. June has been negative on average, but July and August have been strong. September has been a real disaster. All other months, with the exception of February, have been strongly positive. This breakdown would require investors to sell at the end of May, jump back in for July and August, sell again in September and rejoin the game in October. This leaves February to contend with, which would seem to be a good time to drop out again for 28 days.

This is impractical for a number of reasons. First, if the financial whiplash doesn't kill you, the tax and transaction costs will. Second, statistics are averages. What about those years when July and August are up? Also, consider the fact that average losses in June and September are only about -0.2% and -0.5%, respectively. Not exactly heart stopping numbers.

Finally, there is the issue of knowing precisely when to get back in after a market drop. Over the long haul, stocks do well. The stop and start of seasonal timing, the "nay" side says, is just too complicated and too risky. Plus, let's not forget that while many will try, timing the market is a statistically impossible task over any long, revenue-producing time frame.

More from the Nay Side
Scott Rothbort of The Wall Street Journal presents a number of alternative seasonal timing scenarios, all based in part on the "Sell in May – Go Away" adage. He starts with the conventional wisdom that since October is the month of "crashes," selling in May and reentering at the end of October might make sense. Except that on average, the S&P 500 has gained 0.74% in October. If an investor were to liquidate in May and re-enter at the end of September (to take advantage of the 0.74% bump in October) they would forgo the 0.55% average gains realized over the summer months.

Another scenario involves selling in August and coming back in October, thereby avoiding the normal average declines in the dog days and early fall. This, of course, brings investors back to the problem of taxes and fees for what amounts to a two-month vacation from investing.

Finally, Rothbort postulated the notion that gains in the stock market are front-loaded in the first four months of the year. He tested this hypothesis by looking at returns for the S&P 500 for the first four months of every year going back to 1950. He eliminated years in which the index gained less than 8.71% in that four-month period, leaving 16 years in which the S&P 500 gained more than 8.71%. Out of those years, on average, the S&P 500 gained an average of 6.93% – certainly not a return any investor would have liked to miss.

Take Action
At the end of the day, seasonal timing adages, such as "Sell in May – Go Away," seem to respond better to the collection of statistics than to real world investing. Getting in and staying in, both from a statistical viewpoint and from a practical viewpoint seems to be a better play. Are there risks? Of course there are. It's the stock market and, by its nature, the market is filled with risks. On the whole, however, "Sell in May – Go Away" doesn't seem to be any more of a revenue-producing strategy than the many other stock market wives' tales.

Related Articles
  1. Active Trading Fundamentals

    Simple Moving Averages Make Trends Stand Out

    The moving average is easy to calculate and, once plotted on a chart, is a powerful visual trend-spotting tool.
  2. Active Trading Fundamentals

    Megatrends For Maximum Profits

    Predicting how the world will evolve can help you build a portfolio that can roll with the punches.
  3. Active Trading

    Leading Economic Indicators Predict Market Trends

    Leading indicators help investors to predict and react to where the market is headed.
  4. Active Trading Fundamentals

    Identifying Market Trends

    The success or failure of your long- and short-term investing depends on recognizing the direction of the market.
  5. Forex Education

    Anticipate Trends To Find Profits

    Monitoring your trades in real-time can help you anticipate their outcomes.
  6. Investing

    Earnings Cyclicality Exposes Profitable Trends

    Learn to explore a company's past profits to find today's opportunities.
  7. Chart Advisor

    3 Ways to Trade the Rising Volatility

    With volatility increasing in the markets, many are turning to these three volatility-capturing exchange-traded products.
  8. Term

    What is Passive Income?

    Passive income is earned by someone from ventures in which they did not actively participate.
  9. Chart Advisor

    Gold Struggles to Climb Higher and May Fall Soon

    Traders will be watching the price of gold over the coming weeks. We'll take a look at how a couple major moving averages are suggesting that the next move could be lower.
  10. Technical Indicators

    Understanding Trend Analysis

    Trend analysis is the use of past performance to predict future price movement of a security.
  1. Passive Income

    Earnings an individual derives from a rental property, limited ...
  2. The New Deal

    A series of domestic programs designed to help the United States ...
  3. Warren Buffett

    Known as "the Oracle of Omaha", Buffett is Chairman of Berkshire ...
  4. Fractal Markets Hypothesis (FMH)

    An alternative investment theory to Efficient Market Hypothesis ...
  5. Holding Period Return/Yield

    The total return received from holding an asset or portfolio ...
  6. Unloved Stock

    A stock that is out of favor with investors. The term unloved ...
  1. What is the difference between passive and active asset management?

    Asset management utilizes two main investment strategies that can be used to generate returns: active asset management and ... Read Full Answer >>
  2. How are double exponential moving averages applied in technical analysis?

    Double exponential moving averages (DEMAS) are commonly used in technical analysis like any other moving average indicator ... Read Full Answer >>
  3. What is the formula for calculating the capital asset pricing model (CAPM) in Excel?

    The capital asset pricing model (CAPM) measures the amount of an asset's expected return given the risk-free rate, the beta ... Read Full Answer >>
  4. What is the formula for calculating return on investment (ROI) in Excel?

    Return on investment (ROI) measures the performance of an investment by measuring the gain from an investment and the cost ... Read Full Answer >>
  5. How can I use Bollinger Bands® to trade binary options?

    Bollinger Bands can be used to trade binary options, because they are an effective tool to signal when markets become oversold ... Read Full Answer >>
  6. Is it better to buy A-shares or a no-load mutual fund?

    Mutual funds and other pooled investments are popular among investors because they provide a level of diversity and professional ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!