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Trader Talk: Why "sell in May and go away" is not quite so simple

Bob Pisani
Updated

It's that time again: May. Springtime, and time to revisit that old adage — sell in May and go away.

I've written many times about this, probably the most famous of Wall Street saws, so I'll keep this short.

You can argue about exactly why this seems to work, but over long periods there does appear to be something to it. Since 1950, the S&P 500 has had an average return of only 0.4 percent during the May-to-October period, compared with an average gain of 7.4 percent during the November-to-April period. This is according to Yale and Jeff Hirsch, who first brought this connection to light in 1986.

Sounds good, but in the past 10 years, they have refined this call by layering in two additional factors: a technical signal (MACD) and a signal based on presidential cycles.

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The technical signal would get you in earlier than November 1 and keep you in longer than May 1 if the market was trending up. If the market was trending down, it would delay getting you in past November 1, and you might sell before May 1.

The other signal involves the presidential cycle: Don't sell in May in the third and fourth year of the presidential election cycle, when markets tend to outperform. The Hirsches claim that this means you only need to make four trades every four years, greatly simplifying the process.

Combining these two signals, the Hirsches' claim produces turbocharged results: an average return of a loss of 0.8 percent per year for the S&P 500 since 1950 during the May-to-October period, compared with an average gain of 9.6 percent during the November-to-April period.

For those of you who don't get the power of compounded interest, let me make it simpler. A $10,000 investment made in 1949 from simply the May 1-October 31 period would now have $4,550, a LOSS of $5,450. The same $10,000 invested in just the period November 1-April 30 would have produced a profit of $2,166,331.

That is not a typo. $2,166,331.

You can see why this hoary saw has such staying power on Wall Street.