Can the Market Defy “Sell in May” Again?

sell-in-mayIf you subscribe to the “Sell in May, Go Away” investment theory, 2013 was not a good year for you.
The S&P 500 rose 10% from May to November, historically the worst six months to buy stocks. Those gains outpaced the six months that preceded it, and the six months since. That’s a stark difference from the typical Sell in May period.
The numbers don’t lie. The Sell in May phenomenon is ordinarily very real. Since 1950, the average gain in the Dow Jones Industrial Average was a mere 0.3% from May 1 through October 31. From November through April, those numbers jump to +7.5%.
Even recent history supports the Sell in May theory. Over the past five years, the average gain in the S&P 500 from May through October was 3.9%. The November through April gains were almost triple that, at +11.5%.
Those numbers suggest that last year’s booming Sell in May period was an aberration. It was only the third time since the turn of the century that stocks have posted double-digit gains from May through October.
So, with stocks still near all-time highs as the calendar flips to May, do the law of averages suggest we’re on the brink of a major pullback over the next six months? Not necessarily. But the odds are against another major move.
The market has never posted back-to-back years of double-digit gains during the Sell in May period. In fact, only once since 1997 have stocks risen more than 6% in back-to-back Sell in May periods.
Market valuation also isn’t on investors’ side as we enter May. Right now, stocks are dangerously overbought. The S&P 500 is trading at 15.7 times next year’s earnings – higher than the five-year average of 13.2, and the 10-year average of 13.8. It’s also the highest the S&P’s forward PE has been since 2005. Throw in the fact that it’s been nearly three years since a correction of more than 10%, and logic would suggest that a major pullback is imminent.
Here’s the thing about this rally, though: it has defied all logic.
Countless times over the past year, Wall Street pundits have been calling for a mass correction. Each time, stocks have risen higher than ever before. Another near-default by the U.S. government, sequestration cuts taking effect, an unemployment rate that’s been slow to improve – none of it has managed to slow this rally.
And those are real, tangible factors that directly impact the U.S. economy. By comparison, a seasonal phenomenon such as “Sell in May” seems like a much smaller concern for investors.
But it would be foolish to completely ignore history. And that history says we should expect a decline in the next six months.
Really, it comes down to what you believe in more: 63 years of data suggesting a correction is likely, or the power of this market rally.
Time and again in the last two years, the rally has won out.


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