Followers of the “Sell In May and Go Away” market-timing strategy may want to consider selling stocks before the end of April.
The “Sell in May and Go Away” strategy, which also goes by the “Halloween Indicator,” calls for being in the stock market for the six months between Oct. 31 and May 1, and out of the market the other half of the year. Investors who mechanically follow this seasonal strategy therefore wait until the close of the last trading day of April to sell and to the close of the last trading day of October to buy.
Other followers believe that you can do better by sometimes jumping the gun. One prominent “jump the gun” proponent is Jeffrey Hirsch, editor of the Stock Traders Almanac. “Beginning on the first day of April, we prepare to exit these seasonal positions as soon as the market falters,” Hirsch writes in the latest edition of the Almanac.
Hirsch does the opposite in the fall: “Starting on the first trading day of October, we look to catch the market’s first hint of an up-trend.” (To determine if the time is right to jump the gun, Hirsch relies on a trend-following indicator known as MACD, which stands for moving average convergence divergence.)
My performance-auditing firm has been tracking Hirsch’s jump-the-gun strategy since 2002. Its performance is plotted in the chart above, along with the performance of the mechanical version of “Sell In May and Go Away.” You’ll notice that Hirsch’s version of the strategy has beaten the mechanical version, but only slightly. My firm calculates that Hirsch’s version has produced a 7.4% annualized return since May 2002, versus 7.1% for the mechanical one.
Buy — don’t sell — and hold
The bigger question may be whether to follow either version of the “Sell in May and Go Away” strategy. That’s because, as you can also see in the chart, buy-and-hold has performed far better over the past two decades than either of those two other versions, with a 9.0% annualized gain.
That said, buy and hold has produced its larger return with higher risk. Both the mechanical and “jump the gun” versions of “Sell in May and Go Away” are invested in the market just half the time, and so it’s an apples-to-oranges comparison to focus on raw returns only. As judged by their Sharpe Ratios, both of the timing strategies come out ahead of buying and holding — though slightly.
What that means is that had you sufficiently leveraged your investment in either strategy so its risk level was the same as the market, you would have made slightly more money than buying and holding.
You may want to think hard before putting this into practice. You would have needed almost 2:1 leverage to bring either “Sell In May and Go Away” strategy’s risk level up to that of the market as a whole. Meaning that between Halloween and May Day, you would need to be invested 100% on margin — which would translate into many sleepless nights and margin calls.
Of course, the other six months of the year you would be out of the market altogether. But it’s not clear whether, on average over all 12 months, you would feel no more risk than you would with buying and holding.
In the meantime, note that Hirsch has not yet “jumped the gun” on this spring’s sell signal, and therefore remains in the market — for the moment. But, he stresses, a “go away” signal could come at any time.
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
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This post was originally published on Market Watch
