Now that investors are heading into June, "sell in May and go away" is one of those stock market adages that might be sticking in the minds of traders as they make their way toward a lazy summer. But just because a phrase is catchy and rhymes, doesn't make it an optimal trading strategy.
As with most adages, there is some basis in truth. But here's why it isn't right for all investors, especially the active ones.
There are so many strategies and approaches to investing. And while many claim to be the one true path to riches, the reality is that multiple paths lead to the goal of wealth building.
As a starting point, are you a passive or active investor? There is a big difference between a position trader or swing trader that might keep a stock in their portfolio for weeks and months and a buy-and-hold investor that might hang on to a particular issue for years.
"The Stock Trader's Almanac" has compiled market statistics covering the better part of the last century. Historically, it's found a seasonality preference that favors winter months over summer months. "Sell in May and go away" is often equated to summer doldrums where investors were less engaged in trading and more engaged in vacation.
Jeffrey Hirsch, editor of the "Stock Trader's Almanac," describes a simple "Best Six Months Switching Strategy." The simple strategy uses an investment in the Dow Jones Industrial Average from Nov. 1 through April 30 and then switches to fixed income from May 1 through Oct. 31. Not very hard to follow or understand and an easy way to get outperformance in a more passive way.
But Hirsch warns that there are times where deviating from these simple rules makes sense.
"Stock market seasonality is a powerful force," he told Investor's Business Daily. "When it fails to materialize in any given year, it is an indication that other, more powerful forces are at work."
Does A Power Trend Overpower Sell In May And Go Away
David Keller, chief market strategist at Sierra Alpha Research agrees. When asked about "sell in May and go away" on IBD Live he said, "You think of seasonality as seasonal tendencies, not seasonal absolutes."
He's on the lookout for deterioration that follows seasonal patterns but Keller pointed out, "May has been up five of the last five years. July has been up five of the last five years. So, May, June, July has turned into a pretty, pretty strong period."
Since IBD Methodology relies on a trend-following approach for its technical analysis, IBD investors often lean into the context of where the chart is over the calendar. They approach summer doldrums differently when the market has been running for months and looks tired over a market rally that seems to be just starting.
A power trend starting could become a deciding factor in how you treat your month of May. Power trends are when a market is in an especially strong position and investors change selling and holding rules to adjust for that strength.
Consider the power trend that started on May 22, 1980, and rose 41% on the Nasdaq that summer. Or power trends from May 14, 1997, or May 8, 2020. The bouncebacks from devastating bear markets in 2000 and 2008 were just on their road to recovery with March follow-through days in 2003 and 2009. These power trends started in April but certainly May was not the time to go away that early in the rally.
Of power trends on the Nasdaq composite that start in May, their average performances are behind those of September, November and December. But May moves are still above the average power trend from beginning to peak, according to IBD research.
Individual Stocks Can Have Their Own Timeline
How would "sell in May and go away" mesh with a winning stock like Nvidia in 2016? When it broke out of a cup with handle at 33.06 before the stock split, would investors have wanted to go away? That gave just a 7% gain when May came around. But after May, while investors would have been "away," Nvidia then doubled over the next six months.
It did that again the next year. May 2017 saw a 38% move and Nvidia doubled again in the months that followed.
More recently, Nvidia wouldn't have been ripe for a sell-in-May approach after it broke out around the April 6 follow-through day after the Covid crash in 2020. Nor would that have been in the case in 2023 or 2024. Using a sample size of one stock doesn't compare to the aggregate of market data offered by the "Stock Trader's Almanac."
Nor does it negate the findings in any way. It does point out the importance of trading style. Are you looking for a more passive investing style of market exposure overall or a more active one with individual stocks? The key difference is in the exceptional over the aggregate.
One can also correctly argue that price-to-earnings ratios matter in the aggregate of stocks. IBD counters they don't matter for the exceptional stock. So investors should be aware of seasonality but open to the exceptional as an active trader.
Follow Nielsen on X, formerly known as Twitter, at @IBD_JNielsen.
