Established in 1776, the St. Leger day is one of the most well-known horse races in England and is run at the Doncaster Racecourse in South Yorkshire in September of every Year. At that time, aristocrats, bankers, and merchants used to sell their stocks in May escaping London’s hot weather, seeking out for their summer vacation then return back at late September to attend St. Leger’s day and buy back the stock market. This is the root from which the trading strategy “Sell in May, go away, come back at St Leger’s day” was developed.
Notably, the concept was embraced in the U.S and there are reasons why this strategy of seasonal trading or cycle might hold rational. The biggest shopping holidays happen from October to April including Halloween, Christmas, New Years, Valentine’s, Black Friday and Cyber Monday, i.e seasonal spending. Moreover, more money circulates through the economy as people get year-end bonuses around December followed by tax refunds from January to April which also includes the release of the first quarter results. On the contrary, the period between May and September tends to be less optimistic, as first quarter results are released, money managers, bankers and traders tend to wrap up for their summer vacation in addition to the U. S election timings where there tend to be uncertainty in the stock market. As stated, the sell in May strategy has been in circulation for decades which makes it questionable nowadays in relation to variating economic, social, political and financial products’ market evolution. That said, a quick return comparison has been undertaken since April 1990 till September 2010.
Dow Jones Industrial Average:
In 4 out of the 21 seasonal cycles contributing to 19%, return in the second phase was higher than the first phase. During 1994, 2000, 2003 and 2009 the second phase of the seasonal cycle outperformed the first part noting that exceptionally, the DJIA recorded 14% return for May-September 2009 versus -12% in October 2008 till April 2009. It is noted as well that the first phase of the claimed cycle has recorded negative returns twice in 21 cycles versus 8 negative returns in the second phase. Moreover, in 2001 and 2008 financial crisis where both cycles’ phases recorded negative returns, the drawback was much less in the first phase than in the second one.
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Index Returns and charts related are calculated by the Article Writer
Exploring the DJIA return since 2018 till April 2022, the second phase of the seasonal cycle provided better returns which makes the “Sell in May” questionable specially if we compare two main events, the 2008 financial crisis and the 2019 pandemic, we will notice that the market reaction was different. In the 2008 financial crisis, the DJIA lost -8% during the cycle’s first phase and -14% in the second phase followed by -12% at 2009’s first phase. During the Covid-19 pandemic the DJIA lost -10% in the first phase of the cycle, followed by 9% return in the second phase and finally 28% from October 2020 till April 2022.
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Index Returns are calculated by the writer using close price
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Index Returns and charts related are calculated by the Article Writer
Given the current economic status of record high inflation, central banks’ aggressive tightening policies, supply chain restructuring strategies and lately the Russian Ukraine war aside of the technological evolution and dynamic introduction of financial products since the inception of the “Sell in May" concept, there might be minimal bias towards buying the market in October till April and sell in May in reference to historical data, but traders should also consider exceptions where such a strategy is not applicable and, take decisions in accordance to price actions and technical analysis knowledge.
The content published above has been prepared by CFI for informational purposes only and should not be considered as investment advice. Any view expressed does not constitute a personal recommendation or solicitation to buy or sell. The information provided does not have regard to the specific investment objectives, financial situation, and needs of any specific person who may receive it, and is not held out as independent investment research and may have been acted upon by persons connected with CFI. Market data is derived from independent sources believed to be reliable, however, CFI makes no guarantee of its accuracy or completeness, and accepts no responsibility for any consequence of its use by recipients.