Sell in May and go away: Sage advice, or an old wives' tale?
If you follow stocks, you've no doubt heard the saying about selling in May, and you've probably thought about doing it.
So is there any merit to this aphorism?
Well, maybe we should consider another famous saying: "figures lie and liars figure." Because both sides in this argument can find numbers to back up their case.
Look at the recent history. In both 2010 and 2011, the market and the economy seemed to be recovering from the steep declines of the financial crisis, but then hit major bumps in the road.
A lot of that was due to major disruptions. There were economic blow-ups in Europe both years, in particular the Greek debt crisis. And in 2011, wrangling in Washington led to the budget stalemate, which prompted Standard & Poor's to lower the United States' pristine triple-A credit rating.
But last year, even though the economic recovery seemed to peter out, the S&P 500 rose by more than four percent from the end of April through the end of September.
Still, over the past five years, the strategy of selling in May and buying back in October has worked pretty well.
And historically, we can find longer periods to support selling in May. From 1965 to 1984, the S&P 500 fell in May 15 years out of 20. But that was followed by a streak of 13 straight gains in May.
And over the long term, there doesn't seem to be any advantage to the strategy of selling in May. In fact, The Motley Fool says a buy-and-hold strategy has outperformed the sell in May concept.
As for this year, there are some pros and cons to consider. The economy remains sluggish, and earnings season has shown that companies have not been able to grow revenues. In addition, the S&P 500 and the Dow are both trading at all-time highs today, so some pullback would not be unexpected.
On the plus side, the market's record levels could indicate underlying momentum. There's also the Fed factor: With the central bank buying back $85 billion in bonds every month, and expected to continue doing so for a while, it's hard to bet against stocks.
That's where another market aphorism comes into play: Don't fight the Fed.
Oh, and one more thing: the "sell in May and go away" idea... that didn't start on Wall Street. It originated in London.
-Produced by Drew Trachtenberg
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