Market Timing Strategy

There is an old Wall Street saying, “Sell in May and go away.” The strategy is also known as the “Halloween indicator.”  More specifically, investors who believe in this strategy should sell their equity positions at the end of April, stay in cash equivalents for six months, and then go back into stocks right after Halloween.

 

Over the past 50 years (through 2013), the Dow averaged a 7.5% gain during the winter months and lost 0.1% during the summer months. A 1935 article in the Financial Times refers to the “sell in May” strategy that was already known and followed. Indeed, studies from 108 separate stock markets around the world also support the strategy, according to work done by Ben Jacobsen from the Massey University in New Zealand. His statistical tests detected a seasonal pattern in the U.K. that went back as far as 1694.

 

Jacobsen’s study shows a solid pattern that goes back almost 80 years. He believes the performance gap between winter and summer months has gotten greater in recent years. In the case of U.S. stocks, Jacobsen found the “sell in May” strategy was most pronounced in stock market sectors that focus on manufacturing and production and that the strategy is “almost absent” in sectors such as consumer goods, financial services, technology, and telecom. A hypothetical sector-switching portfolio would have beaten an index by 3.3 percentage points per year over the past decade.