Courtesy of John Nyaradi.
The Reasoning Behind “Sell In May And Go Away” and Whether this Stock Market Slogan will apply in 2012
The cliché, “Sell In May And Go Away,” comes from the idea of investors selling their stocks in May and waiting until November to reenter the stock market. In the period between May through October, investors would keep their cash or invest it into government bonds.
This strategy worked well in both 2010 and 2011. History has shown that the “selling in May and waiting until November to reenter the stock market” strategy works most of the time, and not just in the United States, but also in Europe (NYSEARCA:VGK) as well. This is especially true when the Fed is tightening its monetary policies (i.e. increasing short-term interest rates). The opposite is true when the Fed is easing on its monetary policies (i.e. reducing short-term interest rates).
Research also indicates that the “selling in May and waiting until November to reenter the stock market” strategy works best when it is a bear market as compared to a bull market. This means that most of the stock losses experienced during a bearish market occur between the May to October period. In a bullish market, stock market gains won’t be as great during the May to October period as they are during the November to April period, but there will still be gains, thereby negating the “sell in May and wait until November” strategy.
So then the question becomes, “What type of market are we currently in right now?” While many of the economic indicators that identify a bullish or bearish market seem to point toward a bearish market – relatively weak GDP growth, only a slow decline in the unemployment rate that is still above 8%, conflicting data on the housing market, with luxury homes selling better but average homes still selling far less than before the housing crisis – stocks had been increasing until the latest U.S. Jobs report from last Friday, April 6, which would indicate a bullish market. In addition, the Fed has not increased short-term interest rates for some time, and most reports indicate that it will not increase those short-term interest rates until the end of 2014 unless there is significant improvement in the economy, which looks unlikely as of right now.
Again, the question arises, “Which type of economic market are we in?”
Most analysts believe that a market correction is understandable, expected, and even good for the market long term, as the market was overreaching in terms of gaining too much too quickly based on earnings and fundamentals. However, this doesn’t change their long-term economic forecasts. Barring unforeseen negative catalysts that really derail the market, most analysts believe that the economy will continue to increase, thereby indicating a continuing upward trend for the stock market (i.e. bull market).
This leads these same analysts to believe that the “sell in May and go away until November” strategy that has worked often in the past, including in 2010 and 2011, may not work as well in 2012. Besides the fact that most analysts believe we are still in a bullish market despite the recent decline in the stock markets over the last week, most of those analysts believe that the prices of many stocks will continue to climb over the coming weeks and months, possibly hitting a high some time in the summer.
Therefore, employing the “sell in May and waiting until November to reenter the stock market” strategy could lead to you selling at a lower price in May and buying at a higher price in October, exactly what you don’t want to do as an investor, since you’ll take a loss. Instead, most analysts are suggesting that you buy stocks now while they are on the decline and sell those stocks when November comes around. They believe that investors will be more likely to profit employing this strategy than employing the usual “sell in May and wait until November” strategy.
This reversing of the common “sell in May and wait until November” strategy is not unheard of; history shows that 1987 was a year in which the S&P 500 (NYSEARCA:SPY) kept climbing throughout the summer. Some analysts believe that the trends and economic indicators very closely resemble the trends present in 1987, which would indicate that the best long-term strategy for investors during 2012 is to buy now while there is a pullback in the market and wait until the fall (i.e. November) to sell off those stocks before going away for the winter.
Bottom Line: The usual “sell in May and go away” strategy that has worked often in the past, including in 2010 and 2011, may not be the best strategy for investors in 2012. This is because most analysts believe we are still in a bullish market despite the recent market pullback, plus the fact that many of the trends and economic indicators resemble 1987 when the S&P 500 (NYSEARCA:SPY) continued to climb throughout the summer. Provided that this is what occurs, the smart and profitable strategy for investors in 2012 would be to buy now while there is a pullback in the market, then ride that economic wave until it hits its expected peak in the summer, then sell off in the fall (in or near November) and go away during the winter.
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