This Year, Don't Sell in May

05/12/2009 1:00 pm EST

Focus: MARKETS

Sam Stovall

Chief Investment Strategist, CFRA Research

Sam Stovall, chief investment strategist for Standard & Poor’s, says selling in May has worked historically, but there are reasons it might not this year.

Since the market’s bottom on March 9th, investors [have] piled back into stocks in general, and they favored the beaten-up groups in particular. Except for information technology, all of the sectors that fell more precipitously than the Standard & Poor’s 500 index from October 9, 2007 to March 9, 2009 outperformed the market since then.

And while there remains an abundance of red ink in the “since October 9, 2007” column, investors are beginning to feel encouraged—evidenced by an 8.4% gain in the S&P 500 since the close on January 20, 2009 (inauguration optimism).

Now, investors are wondering if they should be prepared to “sell in May, and then go away.” This saying has proven to be sage advice for investors. No matter whether you look back to 1990, 1960, 1945, or 1929, you’ll find that the S&P 500’s average price change was substantially higher during the six months from November 1st through April 30th than it was during the six months from May 1st through October 31st.

Indeed, had an investor heeded this old saying in 2008, they would have avoided the 30% decline the S&P 500 experienced from April 30, 2008 through October 31, 2008.

Understandably, investors today remain nervous about whether this bear market has truly run its course and if they should follow suit this year. If history is any guide—it’s never gospel—investors may be wiser to “turn a deaf ear this year.”

The current bear market is the 15th since 1929. The S&P 500 tumbled 57% from October 9, 2007 through March 9, 2009, recording the worst percentage loss since the great Crash, and eclipsing the 55% drubbing during the 1937 to 1938 bear market.

But either during or just after these 14 bear market bottoms, the S&P 500 rallied during the traditionally sleepy May through October period, registering an average 12.2% advance and rising in 12 of 14 occasions.

Specifically, the S&P 500 rose as much as 35.8% following the March end of the 1937 to 1938 bear market and 19.4% after the Great Crash concluded. Indeed, the S&P 500 advanced by double digits seven of 14 times during these “sell in May” periods following the end of bear markets.

Of course there’s no guarantee that the equity markets will rise again this summer, following the bottom of this bear market. What’s more, there’s no guarantee that this bear market is actually over.

S&P’s Equity Strategy Group believes the bear most likely ended on March 9, but acknowledges that the S&P 500 needs to experience a potentially painful re-testing process before we are more confident of this conclusion.

So, even though we expect investors to digest some of the recent gains in the coming weeks, maybe this year the saying should read, “If you don’t sell in May, you’ll be happy you stayed.”

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