This saying is defined as entering the market at the beginning of November and exiting at the end of April. Researches found a better performance of the stocks starting with November and finishing with April while for the other 6 months left it’s not such a good period to make profits. Known as the Halloween effect, it represents a seasonal anomaly of the financial markets along with the January effect, Monday effect or the Turn of the Month effect.
The researches made up in 1998 proved that returns were higher in 20 of the 37 studied markets for the November-April period. Even after 1998 the adage “Sell in May and Go Away” worked and it actually became a good investment advice, stock returns being 10% higher in November-April period than in May-October period.
Most of the studies of this effect are telling investors to take advantage of this anomaly considering that it only requires two trades a year. This way investors’ portfolio may get bigger returns comparing with a trading strategy that needs a more active investor with more trades made during the year.
It is important to acknowledge that the Sell in May and Go Away effect is explained in different ways, considering the industry or sector and also the seasonal changes (vacations, temperature changes, the usual less liquidity during the summer, companies switching to new production lines) that are normally made and may lead to a poorer return on investment during the April-November period. The most important factor relates to the specific of the sector. Thus, the consumer sectors usually outperform during summer while production sectors outperform during the winter.
This year the situation is different. Only looking at the Dow Jones and S&P 500 indexes rising to record highs, investors question if this May (2013) is the right moment to sell and go away. Considering the rapid and sustained pace of growing is difficult to predict any corrections in the actual increasing trend. Even if investors are eager to get to the moment when the markets will get down, they may have to wait longer than expected. The factor that has changed the rule this year is the Quantitative Easing policy implemented by Central Banks (especially by Federal Reserve). The liquidity injections change the normal evolution of the markets and as it seems, it also beats the anomalies that were present in the market for such a long time.
Certainly, this year, because of the different market conditions, even the anomalies are not working anymore. What to expect next? For sure the sell in May and go away adage is not working for 2013. Maybe we have to wait a little bit more in order to see a delayed effect which will trigger the investors’ interest.