Market Seasonality Revisited!

Twice a year, in April and October, I remind you of the market’s remarkable seasonality, the popular version of which is known as ‘Sell in May and Go Away’. It calls for getting out of the market on May 1st each year and back in on November 1st.

As with most investment strategies, most investors have only short-term thoughts regarding it. If it worked out the previous year or two, “Well just maybe I’ll consider it for next year.” And if it didn’t work out the previous year then clearly it’s either just a silly theory, or a strategy that may have worked in the past but the pattern has obviously come to an end.

And like all strategies, especially buy and hold, it doesn’t work in every individual year. But it doesn’t have to in order to produce remarkable outperformance over the long term. That’s because in years when the market makes more gains in the unfavorable season when a seasonal investor is out, the seasonal investor doesn’t have a loss, but merely misses out on additional gains. But when the market does have a correction in the unfavorable season, its losses can be well into double-digits, which the seasonal investor avoids.

It’s a shame more investors don’t take the time to obtain the facts.

The seasonal effect is so pronounced that investing based solely on those calendar dates succeeds in the difficult task (even for professionals) of outperforming the market. And it does so while taking only 60% of market risk, a very important consideration.

You don’t have to take my word for it. Independent academic studies provide indisputable proof.

For instance, a 27 page academic study published in the American Economic Review in 2002 concluded, “Surprisingly we found this inherited wisdom of Sell in May to macd histogram be true in 36 of 37 developed and emerging markets. Evidence shows that in the U.K. the seasonal effect has been noticeable since 1694… The risk-adjusted outperformance ranges between 1.5% and 8.9% annually depending on the country being considered. The effect is robust over time, economically significant, and unlikely to be caused by data-mining.”

And a new 54-page study by Ben Jacobsen and Cherry Y. Zhang at Massey University in New Zealand, was just released a few days ago. It’s titled The Halloween Effect: Everywhere And All The Time. It refers to the ‘Sell In May’ pattern as the ‘Halloween Effect’, selling May 1 and re-entering the day after Halloween, October 31.

It confirms and adds to the findings of previous studies. A few quotes from it: “Observations over 319 years show November through April returns are 4.5% higher than summer returns. The effect is increasing in strength. Over the last 50 years the difference between the two periods is 6.2%. It does not disappear after discovery, but continues to exist even though investors may have become aware of it… It is significant in 35 countries… stronger in Europe, North America, and Asia than in other areas… The odds of the strategy beating the market are 80% for horizons over 5-years, and 90% for horizons over 10-years, with returns on average of around three times higher than the market.”

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