The saying goes that it is best to sell in May and go away, but what does that mean? The phrase is actually a shortened version of a longer saying that dates back to the 1800s: “Sell in May and go away, and come back on St. Leger’s Day.”
St. Leger’s Day is September 14th, and the saying suggests that it is better to sell your stocks in May and leave the market until September. There are a few different reasons why this might be wise advice.
One reason is that stocks usually perform better from November to April than they do from May to October. This may be because there are more earnings reports released during the winter months, or because investors tend to be more optimistic during the holiday season.
Theories for the Seasonal Divergence
There are many different theories as to why there is a seasonal divergence in stock prices. Some of the most popular theories include:
1) The weather-based theory suggests that stock prices are affected by the weather. When the weather is good, people are more likely to spend money and invest in stocks, driving prices up. When the weather is bad, people are less likely to spend money and invest in stocks, driving prices down.
2) The holiday effect theory suggests that stock prices are affected by holidays. During major holidays, such as Christmas or Thanksgiving, people are less likely to invest in stocks because they are spending time with family and friends. This drives stock prices down.
3) The earnings announcement theory suggests that stock prices are affected by company earnings announcements.
Why Not Sell in May and Go Away?
There’s a reason why the old adage “sell in May and go away” has stuck around for so long. For centuries, it’s been shown that selling stocks in May and going on hiatus until the fall generally results in better returns than sticking around all year.
There are a few reasons for this. First, the summer months are typically slower for the markets as traders take vacations and investors focus on other things. This can lead to increased volatility and poor performance as buyers and sellers battle it out.
Second, many companies release their quarterly earnings reports during the summer, which can cause stock prices to jump or drop depending on how well they did. With so much information flying around, it can be tough to make sound investment decisions during this time of year.
Finally, September is often when the markets start to prepare for the end of the year.
‘Sell And Go Away In May’ Statistics
The saying goes that you should “sell in May and go away,” and according to recent statistics, this may be a good idea. In the past, stocks have tended to perform worse from May through October than they have during the other six months of the year.
This trend is particularly pronounced in the United States. For example, since 1950, the S&P 500 has gained an average of 7.3% from November through April, but only 2.1% from May through October.
There are several potential explanations for this phenomenon. One possibility is that investors tend to become more cautious as we approach summertime, leading them to sell off their stocks and wait until autumn to buy back in.
Another possibility is that companies tend to release their worst earnings reports during the summer months, causing stock prices to drop.
‘Buy In October And Sell In May’ Strategy
The saying is that you should buy in October and sell in May. This so-called “sell in May” strategy has been around for a long time and there’s some truth to it. The idea behind it is that the stock market tends to do better from November through April than it does from May through October.
There are a few reasons for this trend. One is that many people take their summer vacations in July and August, so there’s less trading going on during those months. That can lead to lower prices as there are fewer buyers in the market.
Another reason is that earnings tend to be higher in the winter months than they are in the summer months. Companies report their quarterly earnings results during January, February, and March, and investors tend to react positively to good news and negatively to bad news.
So should you actually follow this advice?
Alternatives to ‘Sell in May and Go Away’
There is no one single rule when it comes to trading, and there are many different ways to approach the market. One common piece of advice is to “sell in May and go away”, but there are plenty of alternatives for investors who want to stay in the market throughout the summer.
One option is to focus on buying high-quality stocks that have a history of outperforming the market. These stocks may be more resilient in times of volatility, and they can provide stability and growth potential for investors.
Another option is to focus on sectors that are expected to do well over the summer months. For example, technology stocks may be a good bet, as they have historically performed well during the second half of the year. Healthcare stocks may also be a good choice, as they tend to do well during periods of economic uncertainty.
