Followers of my Trade Alert service have watched me shrink my book down to only two positions, the smallest of the year.
That’s because I am a big fan of buying straw hats in the dead of winter and umbrellas in the sizzling heat of the summer. I even load up on Christmas ornaments every January when they go on sale for ten cents on the dollar. There is a method to my madness.
If I had a nickel for every time I heard the term “Sell in May and go away,” I could retire.
Oops, I already am retired!
In any case, I thought I would dig out the hard numbers and see how true this old trading adage is.
It turns out that it is far more powerful than I imagined. According to the data in the Stock Trader’s Almanac, $10,000 invested at the beginning of May and sold at the end of October every year since 1950 would be showing a loss today.
Amazingly, $10,000 invested on every November 1 and sold at the end of April would today be worth $702,000, giving you a compound annual return of 7.10%.
This is despite the fact that the Dow Average rocketed from $409 to $18,300 during the same time period, a gain of 44.74 times!
My friends at the research house, Dorsey, Wright & Associates, (
click here) have parsed the data even further.
Since 2000, the Dow has managed a feeble return of only 4%, while the long winter/short summer strategy generated a stunning 64%.
Of the 62 years under study, the market was down in 25 May-October periods, but negative in only 13 of the November-April periods, and down only three times in the last 20 years!
There have been just three times when the “good 6 months” have lost more than 10% (1969, 1973 and 2008), but with the “bad six month” time period there have been 11 losing efforts of 10% or more.
Being a long time student of the American, and indeed, the global economy, I have long had a theory behind the regularity of this cycle.
It’s enough to base a pagan religion around, like the once practicing Druids at Stonehenge.
