There’s an old adage, a seasonal trade strategy in the world of investing that says,” Sell in May and stay away.” For years, this saying, also known as “the Halloween indicator,” has been a philosophy that many people in the industry followed regarding market timing. Essentially, it advises investors to sell on May 1 and buy back in after Halloween.
But why was this the general advice? The rationale behind the philosophy was that if you took your winnings in May and parked and waited until the fall season rolled around, you’d be able to avoid a lot of potentially devastating market turbulence. Believe it or not, there are studies that show that, historically, this was decent market advice. As I’m mentioning it today, the same may not be true.
Is "Sell in May" Based in Theory or Fact?
One of the theories why people believed that “Sell in May and stay away” was a rule to follow was that back in the day, during the long days of summer, most of the stockbrokers weren’t working as actively. Instead, they were off vacationing in the Hamptons, Europe, or other lavish destinations. As a result, there weren't as many potential buyers, so the market was under some static pressure and the lack of buyers depressed the market value.
Some say that the rule had its origins with London based investors that were looking for the opportunity to enjoy the summer months unencumbered by the thoughts of finance.
Today, in our era of international electronic trading, where milliseconds matter and everything is possible, very few people take time off from the market. Brokers can trade from their second home in the Hamptons, Yellowstone National Park, or Italy instead of being trapped behind a desk with a phone and computer on Wall Street. Everything is virtually at our fingertips. Who needs a desk when you can trade on your phone at the beach.
What about the 2024 election season and other uncertainties?
As I write this, the market is highly overvalued in the estimation of many leading professionals and is due for a correction. Remember all those predictions of recession for 2023?
Not to mention, this year we have the 2024 election swiftly approaching. This upcoming electoral cycle will prove to be vastly different from the ones that have characterized most of our market history. It will be interesting to see it play out.
I’m not predicting that we will have that type of summer, but there are many indications that we could have a very volatile season with the with the potential for political shenanigans and whatnot. This potential for unrest, global conflict, and economic uncertainty may finally catch up with the high stock valuations present in the market.
Is there benefit to being out of the market during Summer 2024?
As with all things investing, it depends. More specifically it depends on when you need to access the funds in the market and in what magnitude you need to use them. I cannot say it enough, the game changes on you when you switch from saving for the future to using those savings as the fuel for you lifestyle.
This is why I am such a proponent of structure and strategy not blind adherence to investment doctrine.
The following graph clearly shows that historically the buy and hold strategy out paces the “Sell in May” strategy significantly. However, I want to point out something in addition to this finding. Note how the two outcomes were much tighter until the 1980’s. Also, one should take note of just how much the DJIA has increased since the 1980’s compared to the growth the prior 5 decades. This exponential growth looks a lot like Al Gore’s global warming hockey stick… and it may well be just as dangerous for your future.
While selling and staying away may lead you to miss out on some potential opportunities, there’s also peace of mind in having a protective floor under where you are today, at least for some of your assets, through either investment or insurance strategies to protect against what is happening or may happen.
If selling in May and staying away is not an option, what other options can be considered?
Well, for the savvy investor there are stock options to hedge their risk. For most people this is a strategy that they are not comfortable with, or do not have the ability to execute an effective strategy. For many of these savers, the answer lies in a form of portfolio insurance. To accomplish this insurance a deferred indexed annuity is incorporated into their portfolio. Adding this tool to part of their overall savings portfolio gives them the ability to establish a floor on a portion of their savings while participating in the growth of the index. Independent studies from some of the leading minds in finance have shown that incorporating this tool into a portfolio instead of bonds provides greater protection and overall portfolio growth.
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