Sell in May

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Sell in May and go away is an investment strategy for stocks. It includes a theory (sometimes known as the Halloween indicator) that the period from November to April inclusive has significantly stronger growth on average than the other months.[1] In such strategies, stocks are sold at the start of May and the proceeds held in cash (e.g. a money market fund); stocks are bought again in the autumn, typically around Halloween. It is the belief that its better to avoid holding stock during the summer period.

Though this seasonality is often mentioned informally, it has largely been ignored in academic circles (perhaps being assumed to be a mere superstition). Nonetheless analysis by Bouman and Jacobsen (2002) shows that the effect has indeed occurred in 36 out of 37 countries examined, and since the 17th century (1694) in the United Kingdom; it is strongest in Europe. According to the efficient-market hypothesis, this is impossible.

Cause of the effect[edit]

Although its not clear what causes the effect, what's most interesting is that it shows that stock market returns in many countries during the period May–October are systematically negative or lower than the short-term interest rate, which also goes against the efficient-market hypothesis. Stock market returns should not be predictably lower than the short term interest rate (risk free rate).

Popular media often refer to this market wisdom in the month of May, claiming that in the six months to come things will be different and the pattern will not show. However, as the effect has been strongly present in most developed markets (including the United States, Canada, Japan, the United Kingdom and most European countries) in the last decade - especially May–October 2009 - these claims are often proved wrong.

That said, between April 30 and October 30, 2009, the FTSE 100 gained 20% (from 4,189.59 to 5,044.55)[2]

Academic response[edit]

The effect has largely been ignored in academic circles. Any data is dismissed as an aberration because it contradicts established theory, especially the efficient-market hypothesis. Given that investors are highly rational, such an effect would not persist.

One study which tests the Halloween indicator in US equity markets found similar results as Bouman and Jacobsen (2002) over the same time period but using futures data over the period April 1982- April 2003 and after excluding the years 1987 and 1998 no longer found a significant effect, leading these researchers to conclude that it was not an "exploitable anomaly' during that time period in the United States."[3] Other regression models using the same data but controlling for extreme outliers have found the Halloween effect to still be significant.[4]

“Sell in May and go away” has persisted as a profitable market-timing strategy for stock investors, according to a follow-up study by Andrade, Chhaochharia and Fuerst (2012). They find that the Sell-in-May seasonal pattern persists after the end of Bouman and Jacobsen's (2002) sample. This is important in showing that the Halloween effect is not a statistical fluke detected by data mining. Strikingly, in the 1998-2012 sample on average November–April returns are larger than May–October returns in all 37 markets they study. On average, the difference is equal to about 10% percentage points. Also strikingly, the magnitude of the difference is the same in Bouman and Jacobsen's (2002) and in the out-of-sample analysis of Andrade, Chhaochharia and Fuerst (2012). Further backtesting by Mebane Faber has shown this effect has been place since 1950.[5]

See also[edit]

References[edit]

  1. ^ Twin, Alexandra (2008-05-01). "Wall Street: Sell what in May and go away?". money.cnn.com. CNN. Retrieved 2008-11-25. 
  2. ^ "Google Finance FTSE100 historical prices". 
  3. ^ Maberly, Edwin D.; Raylene M. Pierce (April 2004). "Stock Market Efficiency Withstands another Challenge: Solving the "Sell in May/Buy after Halloween" Puzzle". Econ Journal Watch 1 (1): 29–46. Retrieved 2008-11-25. 
  4. ^ Witte, H. Douglas. "Outliers and the Halloween Effect". Econ Journal Watch 7(1): 91-98. [1]
  5. ^ Mebane Faber. "Sell in May And Go Away Or The Seasonal Switching Strategy". [2]

Further reading[edit]