SELL IN MAY AND GO AWAY, BUY AGAIN ON ST LEGER DAY…

by Michael on April 28, 2012

I am sure that all investors know the famous old adage : ‘SELL in May and go away, buy again on St Leger Day,’? 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.

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 theUS market in 1931, before the index began to fall again. What followed was the second and most damaging leg of the Great Depression.

Last year this worked quite well with a terrible summer. But really the time to buy was December with a nice New Year rally. Maybe this year being a Presidential election Year, the easy money will be turned on to win some votes, but I cannot see it. I am hoping for a Wave 5 type rally to take us into mid May and then I want to liquidize my portfolio and wait to invest in the next Santa Rally.

Good luck with whatever you do.

 

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