‘Sell in May and go away, come again on St. Leger’s Day’, or so the ancient wisdom goes. According to convention, investors do well by exiting the stock markets during the quiet summer months, only returning in mid-September.
Not satisfied with old wives’ tales here at FuturesTechs Towers, we decided to do a little bit of empirical research and find out for ourselves if this had worked in years gone by.
In order to spice it up a little bit, and to add some “timing” to the whole affair, we also decided to consider the amendment offered by another technician (the excellent and well-respected Axel Rudolph at Dow Jones): “Sell in May and go away, come again on St. Leger’s Day so long as there is a Stochastic crossover sell signal.” Ooh-err!
The results?
It turns out that this rule hasn’t been too bad at all, looking back for the last 20 years.
We put the start of the summer period as the day of the first Stochastic crossover sell signal in May or, if there was none, as May 31st. The end of the summer was defined as the day of the St. Leger Stakes, the horse racing meet in Doncaster that’s been running since the 18th century, and which is always held in mid-September. We use the Slow Stochastic indicator with the typical parameters.
So here’s a simple comparison: the returns for each of the last twenty years (blue) versus the annualised returns for each summer (red):
Fig 1.
The chart shows that the red series was quite a bit lower than the blue series on a couple of occasions (1992, 1998, 2001, 2002, for example), meaning that summer returns were much worse than the annual returns in each of those years. And we also see that the years in which the summer significantly outperformed the year as a whole weren’t very common.
So now let’s compare the same annual returns versus the returns achieved by sitting out during the summer period (selling in May and coming back in September). The annual returns are in blue again, with the returns from the “Sell in May” strategy in purple:
Fig 2.
This shows that the returns from sitting out for the summer months were better than for the year as a whole in 1990, 1992, 1998, 2001, 2002, 2006, 2007 and 2008.
What’s also going on here, though, is that the returns from summer were greater than zero for 11 of the 20 years in question, so that for each of these years you were better off staying invested rather than sitting out. Even if the summer returns weren’t that great, they were better than the zero gained by doing nothing for that time.
In general, though, the records show that there has been some good success in leaving the fray for summer, as illustrated by this summary:
1989-2008 Average Returns
Annual 6.03%
Summer (annualised) -1.03%
Sell in May Strategy 7.39%
The average return for each of the past 20 years has been 6.03% but, by employing the Sell in May strategy, the average return rises to 7.38%. The average of the annualised returns for the summers has actually been negative.
Now let’s look at the suggested amendment to the rule, and use the Stochastic sell signal. We find that when you only sell out in the years when there was a sell signal, the strategy does improve a little. This is illustrated by Figure 3, where we simply stayed invested for the years when there was no signal:
Fig 3.
Waiting for a Stochastic sell signal meant that you would still have been protected from summer losses in 1990, 1992, 2001, 2002, 2006, 2007 and 2008 (you would have suffered pretty big losses last year anyway, of course). This strategy performed worse than simply staying invested for the year in 1989, 1991, 1993, 1995, 1997 and 2005. The average return from this strategy, however, is still an improvement on simply selling out (which was already an improvement on staying invested):
1989-2008 Average Return
Annual 6.03%
Sell in May 7.39%
Sell Signal Strategy 7.49%
Looking exclusively at the years when there was a sell signal, the worst return (except for 2008) was -3%! Some people might consider this to be good value risk management, even if it means missing out on some growth during good years
Our summary box looking only at the years with a sell signal helps to prove how the rule made a big difference:
Sell Signal Years Average Return
Annual 5.75%
Summer (annualised) -3.64%
Sell in May Strategy 8.01%
This isn’t a very formal analysis, of course, but could be worth thinking about. In terms of this year, we had a Stochastic sell signal for the FTSE on the 13th of this month (the vertical line on the chart below).
Fig 4: Stochastic sell signal for the FTSE-100 index, 13th May 2009
The market has gained a little more since the signal, but anybody who thinks that the rally is probably over now might take encouragement from the historical record of weak summer trading. That would make this an opportunity to get out, only coming back for race day in Doncaster next autumn.
Graham Neary (graham@futurestechs.co.uk)
