SELL in May and go away, buy again on St Leger Day

by Michael on September 12, 2011

Masked Marvel produced a great display to win Flat racing’s final Classic of the season, the St Leger at Doncaster on Saturday 10th September 2011. With that race over are we going to see a rally at last in the Stock Market ?

 I first wrote about the old adage of  ‘SELL in May and go away, buy again on St Leger Day,’ and it generated a lot of interest – in fact it was one of the most read texts on this site. After all, this used to be a byword for smart stock market investing.

 The saying goes back to the days when Londonstock brokers took the summer off to launch their “gels” into high society and enjoy the sporting season of Ascot, Cowes, Henleyand so forth, ending with the St Leger flat race over the second weekend in September. With professional investors away racing and shooting over the summer, October to April came to be seen as the serious months for investing, when markets would rise strongly.

An element of this mentality remains in the psyche of the investment community today, with the serious work beginning in the autumn, building up to the Budget, the ISA season and the end of the tax year, all normally long gone by the end of April.

So is it true? Do markets languish in the summer and take off again in the autumn?
On average, the stock market actually loses 1.8% of its value each summer. Compounded over a couple of decades, that makes for a tidy sum…an overall loss of 30%.

In fact, I read recently that following the old saying since 1984 would have returned 55% more than a simple buy-and-hold strategy and that the ‘sell in May’ rule has worked for UK shares ever since 1964.

Overall, in the last 40-odd years, British investors have been 50% more likely to suffer a down month between May and October than between November and April.

Still, “Sell in May and go away” isn’t quite perfect. It suggests buying back in September…but October’s usually rubbish too! This is the month the markets crashed in 1987, 1997, 1998, and most famously in 1929.

So how do prospects look now: since May the markets have fallen from 6100 levels to 5000 levels – a substantial 18% fall.  Maybe it is time to say that the shares are cheap and prices will start to climb before the economy really recovers.

The Americans have their own version called the Halloween indicator, which advises investing between November and April for the best returns. Again this is not without kernels of wisdom. Some of our most spectacular crashes have occurred in October, not least 1929, 1987 and 1991. Furthermore, this summer high levels of debt are likely to suppress economic activity as individuals and governments try to reduce their borrowings.

Some commentators fear any rally on the back of talk of “green shoots” could be a treacherous illusion, like the rally in the US market in 1931, before the index began to fall again. What followed was the second and most damaging leg of the Great Depression.

 So are the markets now going to stage a rally in anticipation of more free money from the Fed or in anticipation of other actions by the Obama administration to strengthen the housing market, provide new jobs and stimulate the economy. Or are we going to see a huge fall in the markets, taking us back to the lows of 2009 on the fears of national debts levels, the possible collapse of the Euro and negative growth caused of over zealous austerity plans.

So what do I do? Do I buy now St. Leger day has passed: share prices look so attractive, but today with the FTSE down another 2%, it is getting scary…..

But as Warren Buffet used to say “Be greedy when others are fearful and fearful when others are greedy”.

Is it time to be greedy?


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