Sell in May? What the Studies Say

In dollar terms, the buy in May and sell in November (i.e., the strategy that is opposite the stock market folk wisdom), performed worst. Over a 34-year period, from 1980 to the present, $1 million invested in the Russell 2000 would have increased to nearly $3 million, far less than the buy-and-hold portfolio, which would total more than $33 million. Yet the sell-in-May portfolio would have more than doubled that, reaching nearly $79 million.

Digging deeper, Gray next compares Sharpe ratios for various asset indexes and finds that, except for the bond portfolio, the Sharpe ratios are "much greater" for stocks between November and April — indicating a higher risk-adjusted return in the winter months.

Further, about 80% of the negative Sharpe ratios (which investors would want to avoid) occur during the summer period.

While finding that the effect exists, Gray offers no explanation of his own as to its cause, citing instead diverse opinions ranging from changing risk aversion and liquidity constraints during summer vacation to mood changes caused by seasonal affective disorder.

Indeed, the debate rages on. Writing on his blog, Lance Roberts of STA Wealth Management points out that the force of the sell-in-May strategy is its success over time as opposed to its success every time.

"As with all Wall Street axioms, they are viewed by the media to be 'valid' only if they work every single year," he writes. "The reality is that no axiom, investment discipline or strategy works all the time. It is the cumulative effect over long periods of time which defines success or failure." 

In his blog post, Roberts cites different opinions as to whether to follow the sell-in-May adage. Two reasons he cites for adherence this particular May include the Dow's closing at a 52-week high on the last day of April and a study showing sell-in-May takes on greater force in midterm election years.

A third financial blogger, Jeff Miller, similarly emphasizes that not every May is an auspicious time to follow Wall Street's folk wisdom and indeed his view of today's market suggests that current economic trends' bullishness outweigh what he deems a small seasonal effect.

"The Great Recession has been followed by a slow and plodding recovery," Miller writes. "We have an extended business cycle with plenty of central bank support. Since I am expecting the current cycle to feature (eventually) a period of robust growth, I do not want to miss it. The 1% seasonal effect will be minor in a month where we get a real economic surge."