Sell in May and go away
The Logic Behind "Sell in May and Go Away"
There are a myriad of reasons for this, most having to dowith the cash flow aspects of the business calendar.
Harding suspects "that the pattern is caused by large extra chunks of money that flow into the market beginning in the autumn with the annual capital gains distributions of mutual funds in November, Christmas and year-end profitsharing bonuses, employers’ year-end contributions to employee’s 401k and IRA plans, and ending in April with income tax refunds."
Other factors not cited by Harding include the business, tax and financial calendar for both companies and individual investors.
In practice, many companies typically place orders beginning in January as the New Year takes hold. That is particularly true for technology stocks, which traditionally have their strongest period from late fall through the spring.
According to John Wagonner, financial columnist for USA Today, tech stocks "fare well in cold weather." Waggoner says, "The old rule of thumb was to buy tech stocks in November around when the American Electronics Assoc. holds its annual meeting and sell them in May, when West Coast investment banker Hambrecht & Quits had its conference."
Sam Stovall, a tech strategist for Standard & Poor’s Capital IQ, also reports that tech stocks average 6.99% gains in the fourth quarter versus the 4.9% gains for the overall Standard & Poor’s 500 Index.
This seasonality is often a function of how tech companies tend to introduce new consumer goods before the holiday shopping season and business products before the beginning of the New Year. It is no surprise then that Apple will introduce the iPhone 5 in October of this year.
Of course, individuals also play into the seasonality of the stock market.
At the start of the year, individual resolutionsto save more often include fully funding an individual retirement account or college savings plan. Moreover, individuals also need to capitalize their retirement accounts by April 15, which directs flows into the stock market in the spring.
Conversely, summer vacations take a large swath of investors away from the stock market.
And when leaving for vacation, individual investors sometimes prudently close out positions, particularly open buy orders. This combination of events leads the stock market lower for the summer vacation months.
Historically,June, August and September are the three worst performing months for the Dow Jones Industrial Average, according to the StockTrader’s Almanac.
Sell in May and Go Away is a Worldwide Phenomenon
According to Harding, it is not just financial markets in the United States.
The "Sell in May and go away" phenomenon is worldwide. Harding notes that, "My research shows that global markets tend to move in tandem, not only in the annual seasonal pattern, but also into and out of bear markets, and even into and out of short-term pullbacks and corrections."
In the Stock Trader’s Almanac, the "Best Six Months Switching Strategy" features "Sell in May and go away" as its foundation.
Under this investing regimen, funds flow into the Dow Jones Industrial Average from November 1 to April 30.From there, for thenext six months, investors transfer their capital over to fixed income financial vehicles. According to the Stock Trader’s Almanac, this"…has produced reliable returns with reduced risk since 1950."
In fact, according to an independent academic study by Ben Jacobsen of the Rotterdam School of Management in 2002, the "Sell in May and go away" strategy produced consistent results.
The study concluded that, "We found this inherited wisdom of ‘Sell in May’ to be true of 36 of 37 markets. A trading strategy based on this would be highly profitable in many countries."
Yo esto del Sell in May no lo acabo de ver claro. Históricamente, es verdad que el semestre mayo-noviembre es peor, pero aún así ofrece resultados positivos a largo plazo. Yo creo que no vale la pena quedarse fuera la mitad del año a menos que tengas una alternativa lo suficientemente provechosa.
Si buscas el timing a medio plazo, puede ser mas interesante buscar puntos de entrada en el semestre bueno y de salida en el semestre malo.
De todas formas los backtesting dicen que se saca mas estando solo en el semestre bueno, por lo tanto es malo debe de ser negativo, tengo que repasarlo, pero yo esto lo tengo en mente.
Looking at monthly data of the S&P 500 since 1950, the straight Buy & Hold strategy of owning, say, 10 units of the S&P 500 at a cost of $194.50 would have given you a final portfolio value of $10,894. That is a total return of about 5500% with a compounded annual return of 7% as of May 28, 2010.
We back-tested the same data by taking a position (10 Units of S&P 500) each year at the end of September and selling the same position at the end of May in the following year. The “Sell in May” method did even better with a compounded annual return of 7.4% over the same time period.
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Doing the same data analysis for the period of September 2000 until May 2010, a “Sell in May” strategy would not only outrank the “Buy & Hold” method but investors would actually come out slightly positive with an annualized return of 0.6%.
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http://www.frog-numerics.com/ifs/ifs_Le … InMay.html
The exact date for selling and buying is important. This seems to be not well known. Selling on May 2 and Buying on October 26 gives excellent results in many blue-chip index markets. Here we understand ‘Sell-in-May’ to be long in the winter season, and to be in cash during summer, not shorting the market during the summer period.
The volatility of returns from ‘Sell-in-May’ is generally lower than compared with a simple ‘Buy-and-Hold’ strategy. This means less stress for investing and/or higher leverage.
During the bull market from 1982 to 2000, the Dow Jones grew ‘only’ +13.5% per year with ‘Sell-in-May’ compared to +15.3% per year with ‘Buy-and-Hold’. During the bear market from 1966 to 1982 the Dow Jones grew +3.9% per year with ‘Sell-in-May’ while not making any gains with ‘Buy-and-Hold’ (-0.33% per year). It was quite similar for the German DAX (test it yourself with the Java Applet!). In the bear market of the Japanese NIKKEI from 1990 to today, you would have lost nearly 75% with ‘Buy-and-Hold’. But with ‘Sell-in-May’ you would have made +2.4% per year in this market.
Generally, backtesting indicated that the ‘Sell-in-May’ strategy works much better in bear markets.
Immediately an explanation comes to one’s mind: Wouldn’t my loss in a bear market be reduced by one half if I am invested just half of the time? Backtesting shows that this explanation is wrong.
Investigating the bear market of the Japanese NIKKEI from 1990 to 2010 (exit May 2 – enter October 26), ‘Sell-in-May’ gives an average return of +2.4% per year. But if the dates are flipped – you buy on May 2 and sell on October 26 – then you will lose -7.9% per year. After 20 years this is a total loss of -92%! Other time periods will perform poorly, too. You get similar results and tendencies for longer bear markets in the German DAX or the Dow Jones. A possible theoretical explanation for the surprisingly good performance of ‘Sell-in-May’ in bear markets is given below.
Dalamar wrote:Si buscas el timing a medio plazo, puede ser mas interesante buscar puntos de entrada en el semestre bueno y de salida en el semestre malo.
De todas formas los backtesting dicen que se saca mas estando solo en el semestre bueno, por lo tanto es malo debe de ser negativo, tengo que repasarlo, pero yo esto lo tengo en mente.
Si haces operaciones a medio plazo como las que mencionas sí que es interesante. En cuanto a lo de que sea mejor el sell in may que el buy & hold en tu backtest creo que es porque acababa al final de 2 bear markets. Y ahí sí que el sell in may es mejor, pero claro, en un bear market lo suyo es vender cuanto antes
There is a very good market model and theory with the potential to explain ‘Sell-in-May’. Prof. D. Sornette (ETH Zurich, Switzerland) describes in his excellent book ‘Why Stock Markets Crash: Critical Events in Complex Financial Systems’ how markets can be modeled and understood as complex systems. In short summary, fundamental analysts consider economic data of the past to calculate a ‘fair’ future price. Technical analysts consider market price data of the past to calculate and/or interpolate future price. These two groups with their very simple strategies interact in a fuzzy way, and their interaction defines the actual price. This interaction forms a so-called complex system with positive feedback, tendency for sudden crashes and fractal-patterned market prices.
It can be shown that price cycles occur on all time scales. As shown in the book, the characteristics of these cycles are based on the network structures of the information flow between individual market players (e.g. who is talking to whom, discussions with other investors, reading blogs and newspaper, or watching TV).
How is this related to ‘Sell-in-May’? The interest in certain markets and the associated patterns of communication and information flow between market players might be dependent on seasonal patterns (*). This would trigger a stable long-term cycle in such markets.
Think of someone invested in a blue-chip index via a mutual investment fund. During summer he might be more interested in relaxing and holidays than in financial markets. Therefore, in such markets of intense media coverage you might find a stable cycle from May to October. If you take oil for example, you will find a cycle from August to December. It’s a different market with different players. You don’t find such cycles in gold, although you often read about the impact of the Indian wedding season.
If there is a multi-year bear market, investors, especially people invested in mutual investment funds that follow an index, suffer painful financial losses. Summer and holidays is a perfect excuse to avoid thinking about the pain associated with losses and financial markets. This changes the information network between market participants temporarily, and amplifies the cycle effect especially in bear markets. On the other hand, in a bull market many people will enjoy checking the gains of their investment funds also from their holiday resort on a regular base, and ‘Sell-in-May’ is not so significant.
Interesante, aunque no me acaba de convencer. Eso sí, si tú lo ves útil adelante.
Yo en lo que tengo fé es en:
– la infravaloración, CAPE bajo y esas cosas
– la calidad, ya sea la típica empresa value o growth, pero growth de verdad, que los beneficios crezcan a lo loco (esto vale para medio plazo)
– el momentum, en la renta variable al menos
– la volatilidad, que sigue un patrón de retorno a la media
A mi los estacionales me gustan para afinar puntos de entrada y salida, por ejemplo, el primer dia del mes y los festivos siguen funcionando muy bien, el rally navideño tambien es muy fiable.
A mi CAPE me gusta, el analisis value no lo tengo muy claro, me sirve mas para descartar que para elegir, los insiders me ayudan mucho, los indicadores de sentimiento y el VIX, el ratio Price/Book value del mercado, no de la empresa… el Low Volatility Anomaly etc…
Todo eso para estrategias de medio/largo plazo.