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Sell in May and Go Away, Or Don’t

by on May 26, 2013 8:30 AM

The stock market comes complete with its own lore. Novice investors are often awed at the depth and extent of the advice that experienced investors and traders spew out every day through the various media, from Barron’s to CNBC.

These tantalizing tidbits are both illuminating and confounding to the investment community and so can be both helpful and hurtful.

For 46 years, the Stock Trader’s Almanac (published by John Wiley & Sons, Inc., and composed by Jeffrey and Yale Hirsch) has compiled its own set of loose rules about repeating patterns in the investment markets, most notably about the Dow Jones Industrial Average, the Standard & Poor’s 500 Stock Average and the NASDAQ.

Anything learned probably happened when some event occurred more than once. So it is with the price and volume trading patterns that stocks create when graphed.

Investors have a wealth of preconceived notions about how to handle their investments based on the sometimes-repeating patterns in stock and bond prices over time.

I say “sometimes-repeating” because these patterns are not intrinsic characteristics of market actions. That is to say, they lack properties that are always true. They do have properties that may tend to recur over time, just not consistently.

While I find the Stock Trader’s Almanac interesting and even useful, just like the Farmer’s Almanac, I do not take it as the guaranteed truth about what will happen to stock prices.

All notions about stock and bond prices with regard to the future are assessments (some grounded, some ungrounded) and are not the final word on what will happen.

Just like the trip to a fortune teller might be interesting and even insightful, it is not the absolute truth about your future. Crystal ball technology has not yet gotten to the point of foretelling the future with certainty.

And so it is with the repeating patterns in investment prices. While we may prognosticate, we do not really know the future with certainty. This extends to even the supposed “insiders” who trade with better knowledge than many investors. Insiders can get their trades wrong, too.

So why would anyone invest, not knowing what the future will bring? Life is all about getting out of bed in the morning not knowing what the day will bring.

We are comforted with the memory of our experiences and presume that the future will be somewhat like the past and that our accumulated knowledge (experiences) will get us through the day. For the most part, most of the time, this seems to work acceptably well.

It’s the same with investing. Although here I must warn investors that past performance does not guarantee future results.

It is easy to get ossified in various market formulae, thinking that selling in May and investing in Treasuries until November (aka “going away”) may be the right investment move in 2013.

So far the markets are up over 4.5% through the 21st of May, making new all-time highs despite the moribund economy, high unemployment and the lack of growth in the country’s Gross Domestic Product (GDP). Post-election years are generally poor performers for the stock markets, yet this year seems to be the exception.

Other notions of stock market lore implore investors not to fight the Federal Reserve. The Fed has been and continues to be lending money for nearly nothing and increasing the supply of money to the economy, apparently pumping up stock prices.

The January Effect forecast a higher stock market this year (so goes January, so goes the year). We did well in January and so perhaps we are set until the end of December, unless something upsets the apple cart.

Rather than accepting the lore of the markets as gospel, perhaps it would be better to watch the data unfold day by day without any notion of what the data might signify.

Being human, we will no doubt assign meaning to the data and either create some new stock market dogma or enforce a former piece of lore. Could it be “sell in May and, no, I think I’ll stay”? Perhaps, but don’t take that as a hard and fast rule.



Dan Nestlerode was previously the Director of Research and Portfolio Management at Nestlerode & Loy Investment Advisors in State College. He retired in 2015 after 50 years in the investment business. A graduate of Penn State University, Nestlerode became an investment advisor in 1965. He can be reached at [email protected]
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