Ever heard of Sell in “May, Go away”? Often heard and read in the media and the investment circle, it is a theory that the period from November to April inclusive has stronger growth than the other months. Hence investors are advised to sell their stocks in May since stocks generally take a tumble and pick them back at a lower price a month later or more.
What is the theory behind this phenomenon? A lot of research has been done to understand this stock market behavior. Indeed, a study published in the American Economic Review in 2002 showed that returns on stock markets in 36 out of 37 countries studied from 1970 to 1998 were higher from November to April than in the May to October period. A more recent research found that the phenomenon did indeed exist for 1998 to 2012 for major stock markets.
What could be the reason? Fund managers and individuals liquidating their positions so that they can go for their summer holidays uninterrupted? More adverse major economic and political events that seem to take place between May to October period?
In the United States, individuals get their annual capital gains distributions of mutual funds in November, and a month later, Christmas and year-end bonuses. So perhaps there is some palatable reasons why the stock market experience stronger growth between November to April. As for Singapore, maybe it takes its cue from the major stock markets and fall in line too.
But did it happen in 2014?
A quick look at the Dow Jones, Nasdaq and Straits Times index tell us that the “Sell in May, Go Away” effect did not happen, at least not for 2014. All 3 indices ended higher at the end of May than the start of the month. Some of our favourite stocks like Apple, Goodpack and Silverlake Axis continued their onward march. The takeaway is that you need to know what you are doing. Looking away just because you think everyone is dumping stocks in May means you have just missed making an early bonus for yourself.
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