What does 'Sell In May And Go Away' mean
Sell in May and go away is a well-known trading adage that warns investors to sell their stock holdings in May to avoid a seasonal decline in equity markets. The sell-in-May-and-go-away strategy is where an investor sells his stock holdings in May and gets back into the equity market in November, thereby avoiding the typically volatile May-October period. Some investors find this strategy more rewarding than staying in the equity markets throughout the year.
BREAKING DOWN 'Sell In May And Go Away'
This strategy is based on the historical underperformance of stocks in the six-month period commencing in May and ending in October, compared to the six-month period from November to April.
Origination of the Phrase "Sell in May and Go Away"
The phrase sell in May and go away is likely a take on an old English saying, "Sell in May and go away, and come on back on St. Leger's Day." This phrase refers to the custom of aristocrats, merchants and bankers who liked to leave the city of London and go to the country to escape the heat during the summer months. St. Leger's Day refers to the St. Leger's Stakes, a thoroughbred horse race in mid-September and the last leg of the British Triple Crown.
American traders who are likely to spend more time on vacation between Memorial Day and Labor Day mimic this trend and have adopted the phrase as an investing adage. However, the numbers also support this bit of folk wisdom.
Do the Markets Drop in May?
Since 1950, the Dow Jones Industrial Average has had an average return of only 0.3% during the May-October period, compared with an average gain of 7.5% during the November-April period. While the exact reasons for this seasonal trading pattern are not known, lower trading volumes due to the summer vacation months and increased investment flows during the winter months are cited as contributory reasons for the discrepancy in performance between the May-October and the November-April periods, respectively.
Disadvantages of Sell It in May and Go Away
There are limitations to implementing this strategy in practice, such as added transaction costs and tax implications of the rotation in and out of equities. Another drawback is that market timing and seasonality strategies do not always work out, and the actual results may be very different from the theoretical ones.
Alternatives to Sell in May and Go Away
Instead of selling in May, some analysts recommend rotation. This means that investors should not cash out their investments but should instead vary them and focus on products that tend to be less affected by the overall slow growth in the markets during the summer and early fall. For example, consumer staples and health care stocks tend to have higher average growth during the May-to-October period.