Sell in May and Go Away But Remember to Come Back in September. Really?

Authors

Sell in May and go away is an old wisdom which is interesting to analyze. And the continuation “Remember to come back in September” completes this wisdom to a real trading strategy. This strategy is quite old. Many sources say that the original saying comes from traders in the City of London and was “Sell in May and go away, come back on St. Leger’s Day”. It dates back at least to the 1930s, when England still ruled India. But, is it a good strategy?

How can we decide if this is a good strategy?

Well, trading strategies try to benefit from systematic price changes. The only appropriate way testing them is betting money on the strategy and trading accordingly. But, if you like to gain insight how this strategy would have performed in the past, you can back-test using historical data. This does not necessarily tell anything how the strategy performs in the future. For such an old strategy, it’s still interesting.

In the following, we will look at how each of the 12 months performed in the history. We take a look at the Dow-Jones index, the German DAX and Japanese NIKKEI.

Looking at Dow-Jones Index

Well, let’s start with Dow-Jones. The following table summarizes the performance of a strategy holding the index just at the specified month during the time period specified.

Table with Dow-Jones monthly performance since 1928

Table with performances: During the specified time period, hold the Dow-Jones Index only during the specific month.

From this table, we can see that January, April, July and December have been exceptionally good months. May and September have been exceptionally bad. Looking at “Sell in May – come back in September”, we find that this strategy leaves out the performance gains in July. Someone following the strategy selling April 30th and buying October 1st would have created an average performance of 4.64% per year. Someone who is just holding the Dow-Jones would have made an average performance of 4.87% per year. “Sell in May – come back in September” has not been a good advice for the Dow-Jones index.

Looking at German DAX 30

For German DAX, we do not have such a long data series. We have to work with a 20 year history, only. So, let’s take a look at the performance.

Table with DAX monthly performance since 1992

Table with performances: During the specified time period, hold the DAX Index only during the specific month.

Looking at the individual years, we find that the individual performance per year varies significantly:The German DAX performed best in April, October, November and December. It performed worst in August and September. The strategy “Sell in May – come back in September” performed on average with 12.98% per year. The simple buy and hold only performed with 7.30% per year. So, “Sell in May” has been great advice for trading in DAX.

Table with DAX monthly performance since 2003

Table with performances: During the specified time period, hold the DAX Index only during the specific month of the specified year.

If we now look at the NIKKEI, the situation is again different.

Looking at Japanese NIKKEI 225

Table with NIKKEI monthly performance since 1984

Table with performances: During the specified time period, hold the NIKKEI Index only during the specific month.

The best performing months in NIKKEI were March, April and December. The worst months were September and October. That means “come back in September” would still include one of the worst months: October. Since the NIKKEI did not really recover from the Asian Crisis in the early 90s, the average return for an investor holding NIKKEI from 1984 until now would be just -0.20% per year. Following the strategy “Sell in May – come back in September” would have been a lot better: 3.67% per year.

Conclusion

In some markets, the advice “Sell in May – go away. Remember to come back in September” has been a significant advantage. But, this is no advice for the future. The changes from year to year are quite big. Especially the Dow-Jones Index proves that such a simple rule is no good advise. Further facts like taxation and dividends change the performance analysis and must be considered for individual advice.

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