Thursday, May 26, 2005

Sell in May and go away?

With Memorial Day fast approaching, it is interesting to examine the wisdom of the old adage “sell in May and go away.” The adage, if followed, would help stock brokers by increasing commissions (assuming investors sold in May and then bought again in September.) Presumably, the logic behind the adage was that investors are vacationing in the Hamptons during the summer so stock market volume and price movement diminish.

And while “sell in May and go away” may actually work over the long run; over the last few years, a better strategy would be to “find the trend and bet on the end.” What I mean is that investors could profit more by assessing where the market has been heading during the first five months of the year and then betting on that trend accelerating during the summer and continuing throughout the fall.

The latest edition of the American stock traders Almanac suggests that “sell in May and go away” was profitable over a 54 year period beginning in 1950. Calculations conducted on a $10,000 investment in stocks and shares back in September 1950 and then sold in the May of every year until 2004, would have seen the initial investment of $10,000 evolve into $486,000. But by doing the opposite and selling in September and buying during May, that $10,000 investment would have actually been reduced to $9,640.

However, over the last three years “sell in May and go away” has not been such a good rule. For example, since 2002 the S&P 500 has accelerated the year’s dominant trend during the summer. In 2002, the summer accelerated the year’s downward trend; in 2003 and 2004, the summer accelerated the upward trend.

The trouble with this simple rule is that it is difficult to figure out 2005’s dominant trend. Until earlier this month, it looked like the market would be flat at best this year. The Amex was doing quite nicely, the S&P 500 was down, and the NASDAQ was down even more. But in the last week or so, the S&P 500 and NASDAQ have really come to life and the Amex has been treading water. I think a driving factor has been the declining price of oil which has recently fallen below its $58/barrel high.

If this trend continues, the summer could be a good time to own software and semiconductor stocks and a bad time to own energy, steel, and auto stocks.


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