Sell in MAY

The fear that stocks are overdue for a correction has been playing in the minds of many investors and specially with the period of MAY- October knocking at the doors.

Yes there is a new concern, statistically at least. The arrival of May means the beginning of a six-month period in the stock market when returns typically are lower at best and often negative.

A seasonal position strategy, with numbers to support suggests that it is better to sell in May and go away and then again come back in November and return to buying. If one keeps doing this every year one would be way ahead of others.

Before we go ahead I would remind you tat there is no easy way to buy and sell in market and never try to time the market.

Sell in May, the concept has compelling support:

Since 1950, the Dow Jones industrial average has produced an average gain of 7.4 percent from November through April and 0.4 percent from May through October.

_ An investor who sank $10,000 into the Dow during the “best” six-month period (November through April) and switched to bonds during the “worst” six months in every year since 1950 would have posted a return of $527,388, according to the Stock Trader’s Almanac. Doing the reverse would have cost the investor $474.

_ Applying the approach to the Standard & Poor’s 500 index, its returns from November through April have beaten those during the following May-October period 71 percent of the time dating to 1945.

_ Adhering to the practice also would have reduced risk. For whatever reason, the stock market crashes of 1929, 1987 and 2008 occurred between May and October.

Why does it work?

While you may call it a random pattern or statistical anomaly, the period from May to October features less market activity. This year, the approach may seem especially timely to those who believe the market is poised for a pullback after a period of remarkable gains.

Roaring back from the financial meltdown of 2008 and early 2009, the Nifty and Sensex has risen back after bottoming out nearly 14 months ago.

And if you believe this bull market has come too far, too fast, and believe a challenging period lies ahead for stocks, you may want to consider this semi-annual rotation strategy of SELL IN MAY.

Given how well the market has done over the past twelve months, perhaps this is the year that the theory will work like a charm.


About Piyush Mishra

A Black swan fooled by Randomness.
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