Does 'sell in May and go away' work?

Eric Lui May 11, 2018 10:41

Investors are supposed to do well by owning stocks from the beginning November to the end of April, then parking the money in money market funds, and repeating the pattern in the following year. Photo: Reuters

At around this time of the year, a lot of space in financial news pages is typically devoted to the seasonal pattern of sluggish performance in May and June and a rebound that follows in July.

“Sell in May and go away” is a well-known trading adage in the West. Investors are supposed to do well by owning stocks from the beginning November to the end of April, then parking the money in money market funds, and repeating the pattern in the following year.

Let’s look back at historical data to see if this common perception has any truth in it.

We have built three mock portfolios, each with a principal of US$100. All three are invested in the S&P500 index, but in different ways.

In the first portfolio, we adopt the buy-and-hold strategy. In the second one, we buy in early November of each year and hold until the end of April the following year. In the third, we buy in early May and hold until the end of October the same year.

The study finds that from April 1979 to April 2018, the initial investment of US$100 has turned into US$2,602, US$1,272 and US$205 respectively. This translates into an annual return of 8.7 percent, 6.7 percent and 1.8 percent respectively.

Given that October is usually a good month for US equities, if we fine-tune the strategy and buy the S&P500 index in early October and hold it till the end of April, the performances of the three portfolios turn out to be even better. It also seems to work well for Hong Kong equities.

The backtesting shows that the strategy of “sell in May and go away” does work, statistically.

Does that mean we should use this approach this year?

The study covers a long period – almost four decades – yet the results for each individual year vary.

This year, for example, the market trend in the coming months may largely hinge on the outcome of US-China trade talks.

The full article appeared in the Hong Kong Economic Journal on May 10

Translation by Julie Zhu

[Chinese version 中文版]

– Contact us at [email protected]

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Eric Lui

Hong Kong Economic Journal chief economist and strategist

Hong Kong

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