Sell in May: "Hello Dead Zone"

05/10/2017 2:50 am EST

Focus: MARKETS

Alan Newman

Founder, Crosscurrents Publications, LLC

Goodbye favorable seasonality, hello Dead Zone! cautions market timing specialist Alan Newman, editor of CrossCurrents

While the adage, “sell in May and stay away” has been bandied about for the last few decades, it has always been given short shrift by the financial industry and despite decades of evidence is still widely disrespected. 

Those in the business of stocks (or most everyone for that matter) cannot afford to be on vacation for half the year, thus the old admonishment continues to be disparaged. One buys in summer as one buys in winter. Nevertheless, seasonal effects not only exist, they have not diminished in the 67 years the phenomenon has been tracked. 

We hasten to give credit to Norman Fosback, Yale Hirsch and Sy Harding for their important research regarding the stock market’s good and bad seasons. 

Messrs. Hirsch and Fosback were the first to discuss this phenomenon and often cited this important dichotomy when the seasons changed. Mr. Harding and I independently did our own research and refined our analysis. The statistics backing up seasonal effects are nothing short of astonishing. 

Since 1950, if you had invested $10,000 in the Dow Industrials on November 1st of every year and sold your investment on April 30th of each year and simply repeated the process until today, your $10,000 would have grown today to $931,059.25 (exdividends), for an average annual gain of 13.4%. 

Choosing the opposite strategy of investing on May 1st of every year, selling on October 31st and repeating the process would now show a portfolio worth only $9936.44 (ex-dividends). That’s correct. After 67 years, the investment would be worth less.

We’ve observed the market for well over five decades and have never found a more amazing dichotomy than this seasonal effect. And yet, if you listen to the industry, they will tell you the business of stocks is solidly year-round. However, reality does indeed, say otherwise.

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