Investing: Sell In May And Go Away?

| May 4, 2012 | 0 Comments

The month of May has a notorious reputation when it comes to investing…

Year-in year-out, pessimistic investors believe stocks are destined to give up their bullish ways once this ill-fated month rolls around.

There’s even an old stock market adage suggesting markets reach their highs in May only to see bears take control as summer arrives.  This long-standing rule of thumb suggests investors go to cash in May, and reinvest when October rolls around.

Maybe you’ve heard of it…

“Sell in May and go away.”

It’s a popular line of thinking for many investors… especially this year. After last summer’s market wipeout, investors are likely itching to get to the sidelines this May.  After all, those who didn’t sell in May 2011 endured a 17% market swoon when Europe’s debt crisis hit full boil.

But before you Sell in May and go away this year, listen up…

According to our friends at Bespoke Investment Group, selling in May and sitting in cash for the next five months isn’t always a wise move.

Let me explain…

Over the past 100 years, the Dow actually ended the month of May positive 52% of the time.  And in the past 20 years, the results are even better with positive returns coming for the Dow 55% of the time.

And what about the rest of the summer?

June through September’s performance is slightly weaker, but not by much.  In fact, markets averaged positive monthly market returns 51% of the time in the long hot summer months.

In other words, on a historical basis, it’s basically a coin toss as to whether stocks perform well or poorly over the next five months.

Yes, some summers have treated investors poorly…

But over the long run, someone who followed the “sell in May and go away” axiom had no statistical advantage over an investor who didn’t.  One year it may work to sell in May… but the next it won’t.

And this is one of those years I think it will pay to stay invested…

Why?

The US economy is on much stronger footing than it was at this time last year.  In fact, real GDP grew by 2.2% in the first quarter of 2012.  Compare that to the first quarter of 2011 when the economy only grew by a measly 0.4%.

What’s more, several areas of the US economy are much stronger than they were last year.  For example, nonfarm payrolls are up 28% over last year.  And at the same time, ISM manufacturing reports are coming in strong.

Finally, one of the most important factors that should convince you to stay invested this year is that quarterly earnings are exceptional.  As a matter of fact, 81% of S&P 500 companies have reported earnings above analyst estimates this quarter.

And believe me, expectations were very high for some companies.

What’s all this mean?

If Europe’s debt crisis heats up again, it shouldn’t cause a huge market disruption for US markets like it did last summer.  Now that’s not to say we won’t see some kind of correction over the next few months.  But I highly doubt we’ll see another market wipeout like we did last summer.

And given the good things happening in the US economy, if you sell in May and go away this year, you’ll likely be buying back in at higher prices come October!

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Category: Stocks

About the Author ()

Justin Bennett is the editor of Commodity ETF Alert, an investment advisory focused on profiting from the ebb and flow of important commodities via ETFs. The commodity veteran and options specialist is also a regular contributor to the Dynamic Wealth Report. Every week, Justin shares his thoughts with our readers on a variety of commodity-related topics. Justin is also a frequent contributor to Commodity Trading Research’s free daily e-letter. And he’s the editor of another highly successful and popular investment advisory, the Options Profit Pipeline.

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