SELL IN MAY AND GO AWAY (Mutual Fund/ETF Newsletter 5/7/15)

It’s very simple. Move into a 100% invested position on November 1st and sell everything on April 30th. $10,000 invested in the Dow on November 1, 1950 would have grown to $838,051. Now if you did just the opposite, buying on May 1st and selling on October 31st, your $10,000 would have shrunk to would $9,322, and that’s before factoring in inflation. Is it really that simple? 64 years of stock market data certainly suggests that it is. We could argue that selling in May has not worked over the past two years. But over the years, there is no question that substantial losses were often avoided by being on the sidelines between May 1st and October 31st of each year. 2008 immediately comes to mind, when the Dow plunged 27.3%, or 2001 and 2002, when back to back losses of 15% occurred. Not to mention the 1987 meltdown -12.8%, or 1974 -20.5%. The big problem we have with the six-month switching strategy is that being out of the market between May 1st and October 31st has only worked 40% of the time. Over the 65 years that transpired since 1950, the Dow has been up 39 times and down 26 times during the May-October period. We’ve often said that there’s no such thing as a perfect indicator. And despite the amazing record, there is no guarantee that it will continue to work. It’s interesting to note that over the 64 years, there was only one period in which the strategy worked for three years or more in a row: 1976-1979. On the other side of the coin, there were six periods in which it was wrong for three or more years: 1950-1955, 1963-1965, 1984-1986, 1993-1997, and 2005-2007.