There is a saying in equities, “Sell in May and go away.” This refers to the theory that investors can do better by selling stocks in May and buying back in November. Given what investors endured over the last three months, it’s not surprising that investors are now asking if they should heed this advice.While it’s hard to pinpoint the origins of this proverbial warning, the predominant theory is vacation time. Large fund managers are just like the rest of us. They work really hard and need time off to recharge. Summer is typically when they travel, and selling stocks before hitting the road often makes for a more relaxing trip.
Behavior can certainly impact market returns over a few months, so let’s take a look at the data to see if they support selling in May. The chart below depicts simulated results for three different strategies from April 1871 through April 2019.
Selling in May and buying back in November (red line) would have taken $1 and turned it into $1,763. The opposite, selling in November and buying back in May, did much worse (blue line). This only returned $62. Therefore, it appears that the adage holds some merit.
However, the green line shows the performance of a buy and hold strategy. The return on a $1 investment grows to around $500,000, which is over 280-times larger than the red line.
The whole point behind a short-tern trading strategy is to outperform a buy and hold one by a considerable margin to justify the trading costs and taxes paid. It appears that this data, albeit backtested, suggest investors ignore the warning.
The Bottom Line
Think about what it took to fix a car in the 1980s versus today. Back then, a wrench and a basic understanding of an engine could fix most problems. Today, consumers practically need an engineering degree to fill tires with air. The sophistication has turned cars into computers on wheels, and financial markets have evolved in a similar manner. Consider the following:
Depth: Satellites now capture high-resolution pictures of parking lots, shipyards, farmland, etc. Computers then analyze these images to count cars in parking lots, ships in port, and corn stalks being harvested to spot trends before the media can report anything official.
Latency: Speed is so critical that it motivated Spread Networks to spend over $300 million to lay 825 miles of straight-line optical fiber to shave off three microseconds (three millionths of one second) of communication time between the futures markets in Chicago to the stock markets in New York. This went live a decade ago1. Just imagine how much faster trading moves today.
Mind Reading: Firms now utilize Natural Language Processing (NLP) in their trading strategies and are completing tasks no human could ever tackle. NLP is a technology that trains computers to analyze and derive meaning from human language in a smart and useful way. It is based on artificial intelligence that examines patterns in data to improve a program's own ability.
Meaning, when the Federal Reserve releases minutes from is most recent meeting, a computer can read the entire statement, calculate the mood and tone of the author by the grammar and punctuation used, and then trade stocks based on the computer’s assessment of where the Fed’s monetary policy is heading. This is all done in the time it takes a mere mortal to click on the link to read the press release.
Back when we could fix our own cars, only the military used satellites, the world wide web was science fiction, and programmers used floppy disks and played Pong.
Professional investors on Wall Street have also changed. Old-school traders have been replaced with MBAs and PhDs from some of the most prestigious academic institutions in the world, and these traders don’t use wrenches.
The bottom line is that today’s stock market consists of artificial intelligence on top of wires that transfer data close to the speed of light being driven by some of the smartest people alive. It is highly unlikely that a trading strategy predicated upon selling before Memorial Day and buying back after Halloween could consistently outperform. Therefore, stick to a long-term plan based on fundamentals rather than a short-term one that rhymes.
Mike Sorrentino, CFA
Chief Investment Officer
Brian Malizia, President
Three Key Points
- “Sell in May and go away” is commonly heard on Wall Street this time of year.
- Selling in May and buying back in November has outperformed some but not all strategies.
- Markets are far too sophisticated these days to rely on an adage that rhymes to meet your long-term investment goals.
This material has been prepared for informational purposes only and should not be construed as a solicitation to effect, or attempt to effect, either transactions in securities or the rendering of personalized investment advice. This material is not intended to provide, and should not be relied on for tax, legal, investment, accounting, or other financial advice. Jay Street does not provide tax, legal, investment, or accounting advice. You should consult your own tax, legal, financial, and accounting advisors before engaging in any transaction. Asset allocation and diversification do not guarantee a profit or protect against a loss. All references to potential future developments or outcomes are strictly the views and opinions of Jay Street and in no way promise, guarantee, or seek to predict with any certainty what may or may not occur in various economies and investment markets. Past performance is not necessarily indicative of future performance.