ASX Education – Sell in May and go away
MAYDAY MAYDAY MAYDAY
After a 27% rally in the ASX 200 since May 1st 2020 we are set up for a repeat of the old adage "Sell in May and Go Away".
I have written about the “Sell in May and go away” concept every May and make the regular comment that the only reason this idiom survives is probably because it rhymes, people remember it because it rhymes, it persists because it rhymes. I wonder, had there been a word that rhymed with April or October maybe the market would be a sell in October and “Sell in May and go away” would have disappeared?
But it hasn’t, and it is doubtless because, astonishingly enough, the idiom “Sell in May and go away” works in many markets over long time periods. Here are some numbers:
- Since 1936 the average return on the All Ords in the six months before May (1st November to 30th April) is 5.1%.
- Since 1936 the average return on the All Ords in the six months after May (May 1st to 31st October) is 2.4%.
- Since 1982 the average return on the All Ords in the six months before May (1st November to 30th April) is 6.52%.
- Since 1982 the average return on the All Ords in the six months after May (May 1st to 31st October) is 1.6%.
In other words, since 1936 your chances of making money in the market in the six months ahead of May have been over double your chances of making money in the six months following May.
If you take the same calculation post the '87 Crash to remove that big October fall then the numbers are still 2.3% and 5.9% – so the October 87 Crash is not responsible for this statistic alone.
To further add credibility to the rhyme an empirical study in 2001 showed the same phenomenon remains true over a host of world equity markets. Here is a chart from the Bouman and Jacobsen study in 2001. You will see it shows a huge disparity between the returns from developed share markets between the Northern hemisphere summer months (white bars) and winter months (black bars).
This study of 37 stockmarkets by Bouman and Jacobsen concluded that in 36 out of the 37 countries “November to April returns are large in most countries, while average returns in the period May-October are not significantly different from zero and are often even negative”. They also stated that the effect is particularly strong in European countries, is “robust over time” and in England “the effect has been noticeable since 1694”. They examined several possible explanations but declared “none of these appears to convincingly explain the puzzle”. But I think I can explain the puzzle, being an Englishman.
May is the beginning of the English summer social season. It is the time of year when warmer weather begins and flowers and trees start to blossom. The social calendar is ushered in by the May Day holiday (maypoles and all that – May 6th this year is the UK May Day national holiday) then comes the rigorously organised English Polo season followed by the first Cricket Test match, the start of the Trout fishing season, the Point to Point season, the Croquet season, Royal Ascot, Wimbledon, Henley Royal Regatta, Glorious Goodwood, Cowes Week, the Grouse Ptarmigan and Snipe season quickly followed by the Partridge Duck and Goose season. It finishes up with the running of the St Leger Cup in Doncaster England in early September. October is almost a blank. Time to get the hunters in, the tack oiled and the hounds warmed up.
The original saying was “Sell in May and go away and come back on St Leger Day”. The main stock market operators at the time were the English Aristocracy. The summer social season turned the share market into a desert. No point hanging around. No point having your money in the share market and your eyes on the fillies. Best to “Sell in May and go away” and come back at the end of the summer social season when the rest of the Aristocracy returned to trading shares as well.
(By the way there are a couple of words that don’t rhyme with anything in the English language…Orange and Chimney….ask your kids to tell you a word that rhymes with one of them – always shuts them up for ten minutes).
Worth mentioning a couple of other observations about the calendar year and the share market:
- In terms of volatility the most risky month is October.
- The least risky is June.
- The average monthly return from the All Ords since 1936 is 0.58%.
- There is a typical rally in July in Australia which is possibly a recovery from a poor June which sees tax loss selling ahead of the end of the financial year and a better July as the new money released by decisions made before the financial year end whilst doing the end of year accounts is dumped into the market.
Back to our market today. Here is a chart of the All Ordinaries index since 1987 on a seasonal basis showing the performance on average day by day over a year. I have marked the seasonally flat periods and as you can see the first dull period starts tomorrow and runs for two months before the July money dump after the end of the financial year, and the market then flattens out again until the “Santa Claus” rally in December to the end of April.
But before you get fearful and dump everything because its May Day you might just notice the scale – the average fall from peak to trough in most cases is less than 2% and is probably due to the bank sector going ex-dividend rather than the market selling off.
I also rather abhor the use of past statistics as a predictor of the future. Some newsletters/commentators/analysts make a career out of spotting past coincidences and then pass it off as prediction. In the end wherever there are numbers there are statistics and,they are not predictive, they are in fact, just statistics, a summary of the past. Add up the performance of the market every month for a few years and of course one month is the best and one is the worst, but it doesn't mean that month will be the best this year.
So I am naturally sceptical.
But the bottom line is that there is some truth in it in the past – as for this year…you can probably forget about selling in May because it’s May. But you might sell in May because the market tops out, if it does, which is a completely different concept.