Sell in May? Don't Overreact

05/20/2014 9:00 am EST

Focus: STOCKS

James Stack

President, Stack Financial Management

Don’t be too quick to jump on the "Sell in May" bandwagon; such truisms are not as dependable as they may seem, explains Jim Stack, market historian and editor of InvesTech Market Analyst.

Summers may be prone to stock market weakness, but investors still enjoy gains the majority of the time. Looking at the seasonal summer performance of the S&P 500 (SPX) since 1960, we’ve seen that 63% of the summers saw the market move higher. If we look only at these positive summers, the average gain was 6.4%.

In fact, we found that the market was just as likely to experience double-digit gains over the summer period as double-digit losses. There were seven years where the summer period ended with greater than a 10% gain and an equal number of years with summer losses exceeding 10%.

Of course, that’s not as strong as the winter track record, where double-digit gains outnumbered double-digit losses by 5:1, but it’s a sound reason to take the annual “Sell in May” script with a grain of salt.

More importantly, those double-digit summer losses occurred only during bear markets. Indeed, all seven double-digit summer losses since 1960 coincided with these bear market periods.

Only three summers (1971, 1977, and 2011) saw six-month declines greater than 5% that were not associated with a bear market. Of course, sizable market corrections are always possible, but unless bearish warning flags are flying, summer weakness has generally been mild.

In addition to the seasonality observed in the performance of the S&P 500, sector leadership tends to shift significantly as the market moves from the November-April period into the summer months. As a result, there are some steps you might consider.

Healthcare and Staples are the most resilient sectors during the summer, and it’s generally a good idea to have a substantial allocation in these segments. Technology is a close third.

Conversely, the Industrials, Consumer Discretionary, and Materials sectors have averaged negative returns in the summer, and this may be a good time to trim positions.

Overall, the stock market may tend to lose momentum from May through October, but it’s important to remember that this period is usually profitable as long as bearish warning flags remain absent.

Try to not overreact to the “Sell in May” headlines as it’s far more important to rely on our key indicators which, for now, are still in bullish territory.

Subscribe to InvesTech Market Analyst here…

More from MoneyShow.com:

Top Timer Eyes Bull-Bear Debate

Top Techs and Dow 18,000

Ukraine, Russia, and the US Markets

Related Articles on STOCKS