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Should You Listen To The 'Sell In May' Adage?

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April 19, 2016
Should You Listen To The 'Sell In May' Adage?

Soon investors may start hearing the old "Sell In May and Go Away" market adage. Wall Street is littered with these axioms and seasonal tendencies. Should you listen? Or, is this just more "noise" in an already noisy trading world?

 A Look at the Numbers

Since World War II, the time of year from November 1 to April 30 saw the S&P 500 rise on average by 6.9%, while the period from April 30 to October 31 saw an average increase of 1.4%, says Sam Stovall, managing director at S&P Global Market Intelligence. Baseball fans may want to break that down into a batting average: "The November-April period beat the May-October period 72% of the time," Stovall says. See figure 1 below.

sp500-seasonal-performance

FIGURE 1: S&P 500 PERFORMANCE DURING SIX-MONTH PERIODS.

The S&P 500 has on average increased by 6.9% in the period from November to April. It rose on average by 1.4% from May to October. Chart source: S&P Global Markets Intelligence. Data source: S&P Global Markets Intelligence. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Beyond the mysterious "animal spirits" economists like to talk about when it comes to financial markets, what explanation could there be for this noticeable historical trend? Stovall points squarely to capital inflows, which tend to peak early in the year with pension fund managers adding to holdings, and individual investors investing year-end bonuses and maxing out IRA accounts prior to April 15. Come the summer months, "investors focus more on tans than their portfolios," Stovall adds. 

Factors At Play This Year?

Every year has its own unique fundamental macro market drivers and 2016 is no different. JJ Kinahan, chief market strategist at TD Ameritrade, points to the "sell in May adage" and notes: "There have been years that this has worked in the past. This has been such an unusual year some of the trading axioms aren't applicable right now." 

The Federal Reserve continues to loom over the stock market with the unwinding of its near zero-interest rate policy and so does a unique presidential campaign, which is causing its own brand of uncertainty in the market. The Fed and election cycle have contributed to significant price swings in the S&P 500. "In the first three months we saw a violent move down and a violent rally back up. Things are moving quickly. There is a lot of nervous trading both to the upside and downside. Even though the VIX is low the intraday moves have been pretty big," Kinahan says. 

The old sell in May adage advises investors to walk away from the market this spring, but that also could mean walking away from opportunity. "This has been a year of tough movement, but lots of opportunity. You never want to walk away from opportunity," Kinahan says. 

"When volatility has increased it has provided opportunities for both sides of the fence including day traders and longer-term investors. Those who are longer-term investors can buy things at lower levels," Kinahan says. 

For traders and investors looking to track volatility, Kinahan suggests checking out an S&P 500 chart with an overlay of the CBOE Market Volatility Index (VIX). See figure 2 below. "This shows how volatility can increase quickly and when it does it offers opportunities for trading types and longer-term investors. Over the last three years we've rallied, we've gone down, we've rallied. The sell-offs have provided opportunities for longer-term traders," Kinahan says. 

Maybe this year, as the financial news outlets trot out their stories about selling in May, it might be time to put on your blinders, shut out the noise and stay focused on your trading and investing goals.

sp500-vix-comparison-chart

FIGURE 2: S&P 500 COMPARED TO CBOE MARKET VOLATILITY INDEX.

Volatility as measured by the VIX can increase rapidly, usually resulting in a drop in the S&P 500. Chart source: thinkorswim® by TD Ameritrade.  Data source: Standard & Poor’s, CBOE. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

To create this chart in the thinkorswim platform, click Charts > type “SPX” symbol in symbol box in top-left corner > Click Studies > Quick Studies > Compare With > Custom Symbol > type “VIX”. To switch to a 3-year weekly chart, click the menu that shows “D” next to Style at the top of the page. In the menu select “3Y:W”.

The information presented is for informational and educational purposes only. Content presented is not an investment recommendation or advice and should not be relied upon in making the decision to buy or sell a security or pursue a particular investment strategy.

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