Followers of 'sell in May and go away' have lost out on a stock rally
Investors who sold in May have missed out on nearly a 7% return from the S&P 500 since then.
If you "sold in May and went away," is now a good time to get back in?
I'm referring, of course, to the six-months-on, six-months-off seasonal strategy that calls for going to cash on May Day and returning to the stock market on Halloween. This strategy, which is also known as the "Halloween Indicator," attempts to exploit the historical tendency for the stock market to produce the bulk of its long-term returns between Halloween and the subsequent May Day.
The stock market hasn't adhered to this pattern this year, however. Since the end of April, the S&P 500 SPX has produced a 6.9% total return, more than triple the historical average for the six months from May through October. Followers of the strategy are impatiently wondering if they should wait until Halloween to get back in, or instead jump the gun and get back into the market sooner. Still others are wondering if recent experience means they should stop following the strategy altogether.
The above chart helps us to answer this question. As you can see, buying and holding over the past five- and 10-year periods has far outperformed three different ways of exploiting the historical tendency for market weakness between May Day and Halloween. These three alternate strategies are:
-- The traditional Halloween Indicator, which mechanically goes to cash on May Day and returns to being 100% invested in stocks on the subsequent Halloween.
-- A "jump the gun" strategy that loosely follows the Halloween Indicator, using technical analysis to determine the best day in the spring to get out of stocks and the best day in the fall to get back in. The particular strategy, whose return is plotted in the chart, was recommended by Jeffrey Hirsch, editor of the "Stock Trader's Almanac" newsletter. (Full disclosure: Hirsch's newsletter is not one of the ones that contracts with my performance-auditing firm to calculate its return.)
-- A sector-rotation strategy that follows the Halloween Indicator, but instead of going to cash in the May-through-October period, invests in the market's defensive sectors such as consumer staples and healthcare. (This strategy was created by Sam Stovall, chief investment strategist at CFRA Research, who in 2018 launched an exchange-traded fund to exploit his rotation strategy, entitled the Pacer CFRA-Stovall Equal Weight Seasonal Rotation ETF. This ETF was delisted in May. The returns plotted in the chart reflect that of the underlying index.)
It's also worth emphasizing that buying and holding has outperformed each of these three seasonal strategies on a risk-adjusted basis. That's crucial, since those seasonal strategies were less risky than the overall market and you might therefore wonder if, relative to their lower risk, they might have performed as well as the overall market - if not better. But that is not the case.
The bottom line: Once again, buying and holding comes out ahead. If you agree that it is a superior long-term strategy, there's no good reason to wait until Halloween to begin following it.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com
-Mark Hulbert
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