Gilles Prince: «Sell in May & Go Away Is a Myth»

The investment adage «Sell in May and go away» is being bandied about more than usual in the face of abnormally high looking performances recently. Profit-taking would seem to be warranted, if only from a common sense perspective. I might point out ruefully that the same reasoning applied – wrongly – last month, the month before that and at the end of January. «Timing is everything,» they say. Is there anything to the idea that it is prudent to sell in May?

Not according to the statistics. We calculated correlations between S&P 500 performances for the months of May and June since 1925. The correlation of -0.03 is categorical. Statistically, there is no relationship. The finding is not much more encouraging if we look at first-quarter versus second-quarter performances, or even third-quarter versus second-quarter performances, where the correlation is -0.19 in both cases. Is a positive performance in May or in the first quarter followed by a more negative performance than normal?

«This makes it very difficult to say that «Sell in May» has been a winning strategy»

To check that these correlations are not misleading, we considered whether the sign for performances from one month to the next might be a better indicator. In terms of monthly returns, a positive month of May was followed by a negative month of June in just 24 percent of cases, which is low. By comparison, a positive month of May was followed by a positive June in 34 percent of cases, making a momentum strategy more effective.

The proportions are essentially the same when we use quarterly data, at 23 percent and 37 percent respectively, and are unchanged when we compare the third to the second quarter. This makes it difficult to say that «Sell in May» has been a winning strategy, at least since 1925. Is there evidence of a trend reversal when performances are unusually high, i.e. sell in May only if performances are outstanding?

By screening performances to focus on returns exceeding 10 percent in the first quarter, we see that second quarters are clearly inferior, averaging returns of 1.1 percent compared with 14.5 percent in the first three months. These performances are certainly much lower, but not negative. It seems to be more a case of consolidation rather than correction. What's more, strong performances are followed by negative ones in just 38.5 percent of cases, which does not indicate a trend reversal. However, it is perhaps here that we see the phenomenon most since it is not found between the third and second quarters.

«The month of May is rich of events»

Of course, these are just statistics. The past is not a guide to the future. Markets continue to be buoyed by the economic outlook, low inflation, and central bank policies. Meanwhile, investors are in a resolutely bullish mood, perhaps overly so, and financial markets look to have properly priced in the good news.

We are therefore watching out for events that could change the market sentiment and validate the saying…, though the causes would be economical and not statistical ones. The month of May is rich of events: We will, therefore, monitor any results or delay in the Chinese-American trade negotiations, the U.S. decision regarding tariffs in the automobile sector, the evolution of oil prices after the exemptions to Iran oil sanctions are removed, or the n-th Brexit vote.

One thing is certain: the old saying of «Sell in May and go away» is not a reason by itself to take profits, but May could be a dangerous month.

Gilles Prince joined Edmond de Rothschild (Suisse) in August 2009 and has more than 20 years of market experience. He is chief investment officer for Switzerland, in charge of the CIO office for private banking and is a member of EdR global investment committee. He holds a Master of Science in Banking and Finance from University of Lausanne, graduated at HEC at the University of Lausanne and is an FRM, ERP and CAIA charterholder. Prior to joining Edmond de Rothschild (Suisse), he held various investment-related positions at Banco Santander, Lombard Odier, RMF Capital Markets and UBS in Zurich and Geneva.