Everyone in the financial world is familiar with the old adage, “Sell in May and go away; don’t come back till St. Leger’s Day.”* Like most of these sayings that have been around for eons, there’s probably a ring of truth to it. But being a confirmed skeptic, I decided to see for myself.
Putting the adage to the test
So, what I did was to examine the chart of the S&P 500 since 1996 looking for indications to support this theory. I found that, indeed, the market always took at least one summer dip (usually in the middle of July). Not only that, but after the dip, a rally always followed. So much for the “stay away until St. Leger’s Day” part of the proverb! Had you followed this advice to the letter you would have missed out on some important rallies.
Let’s take a closer look. Below is a chart of the dip dates and values: pre-summer dip peak, summer dip low, and post-summer dip peak. In four of the years (1998, 1999, 2000, 2006) there was a double-dip. Those generally occurred in choppy markets.
You can see that the “Sell in May” clause isn’t strictly true; some of the peaks extended into the middle of June. For those four years with two dips, the first dips generally did peak in May and found their lows in the middle of June. In all of the other years, though, the pre-dip peak occurred later, generally from the middle of May to the middle of June. The lows following those peaks occurred about a month later from the middle of July to the middle of August, although in 1997 there really wasn’t much of a dip. However, in every single case a rally ensued lasting a little over a month on average.
The next table shows the summer dip stats. (Originally, these two charts were all one table but I broke it up for space considerations.) The pre-dip peak to the summer low gave yielded almost 10% on average if one were to short the index at the peak value and cover at the summer low. It took a little over a month on average to realize this return. And if one were to turn around and go long at the summer low and hold until the next peak value, one could have realized an even larger average gain and at a lower risk, too (4.8% compared with 7.2%). Of course, these statistics represent perfect market timing which is a skill that I, for one, don’t possess.
Summary
The moral of this story is that yes, it does pay to sell sometime in early summer, but it definitely does not pay to stay away until the autumn leaves begin turning color. What does pay is to keep an eye out for that one or possibly two summer low values and ride it up for the next month or so. Maybe what the market is doing right now is putting in its pre-summer peak; the only way we’ll definitely know is when (and if!) it makes a subsequent low. When it does, then I’ll be jumping in with both feet.
*St. Leger’s Day is a horse race held at Doncaster Racecourse (in England) in the middle of September.