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CHART OF THE DAY: 'Sell In May And Go Away' | Business Insider
src: static.businessinsider.com

Sell in May and go away is an investment strategy for stocks based on a theory (sometimes known as the Halloween indicator) that the period from November to April inclusive has significantly stronger stock market growth on average than the other months. In such strategies, stocks are sold at the start of May and the proceeds held in cash (e.g. a money market fund); stocks are bought again in the autumn, typically around Halloween. "Sell in May" can be characterised as the belief that it is better to avoid holding stock during the summer period.

Though this seasonality is often mentioned informally, it has largely been ignored in academic circles. Analysis by Bouman and Jacobsen (2002) shows that the effect has indeed occurred in 36 out of 37 countries examined, and since the 17th century (1694) in the United Kingdom; it is strongest in Europe.


Video Sell in May



Causes

Data shows that stock market returns in many countries during the May-October period are systematically negative or lower than the short-term interest rate. This appears to violate the efficient-market hypothesis (EMH), which predicts that any such returns (e.g., from shorting the market) would be bid away by those who accept the phenomenon. Alternative causes include small sample size or time variation in expected stock market returns. EMH predicts that stock market returns should not be predictably lower than the short-term interest rate (risk free rate).

Popular media consider this phenomenon each May, generally rejecting it. However, the effect has been strongly present in most developed markets (including the United States, Canada, Japan, the United Kingdom and most European countries). Between April 30 and October 30, 2009, the FTSE 100 gained 20% (from 4,189.59 to 5,044.55)


Maps Sell in May



Academic response

Maberly and Pierce extended the data to April 2003 and tested the strategy for April 1982 through April 2003 except for two months, October 1987 and August 1998 (when markets crashed). They found that it did not work well in the time period April 1982-September 1987, November 1987-July 1998 or September 1998-April 2003. Other regression models using the same data but controlling for extreme outliers found the effect to be significant.

A follow-up study by Andrade, Chhaochharia and Fuerst (2012) found that the seasonal pattern persisted. In the 1998-2012 sample on average November-April they found that returns are larger than May-October returns in all 37 markets they studied. On average, the difference is equal to about 10 percentage points. The magnitude of the difference is the same in both studies. Further backtesting by Mebane Faber found the effect as early as 1950.


Sell in May and go away? | Chalten Fee-Only Advisors Ltd. | Blog
src: www.chaltenadvisors.com


See also

  • Market timing
  • Calendar effect
  • July effect

Sell In May And Go Away? - AAPL Elliott Wave Cycle
src: elliottwave-forecast.com


References


Sell in May go away signal, come a month early? - Arabian Post
src: thearabianpost.com


Further reading

  • Sven Bouman; Ben Jacobsen (2002). "The Halloween Indicator, "Sell in May and Go Away": Another Puzzle". American Economic Review. 92 (5): 1618. doi:10.1257/000282802762024683. 
  • Maberly, Edwin D. and Pierce, Raylene M. "Stock Market Efficiency Withstands another Challenge: Solving the 'Sell in May/Buy after Halloween' Puzzle" (April 2004).
  • Jacobsen, Ben and Visaltanachoti, Nuttawat, "The Halloween Effect in US Sectors" (May 8, 2006).
  • Andrade, Sandro C., Chhaoccharia, Vidhi, and Fuerst, Michael E. "'Sell in May and Go Away' Just Won't Go Away" (July 2012).

Source of the article : Wikipedia

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