| CATEGORY: NEWS AND ANNOUNCEMENTS |
Technical Analysis: Sell in May - fact or fiction? |
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By Michael Hewson
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Fri 24 Apr 2009
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LONDON (SHARECAST) - As we head in to the summer and hopefully sunny weather and long evenings, one of the oldest sayings in the City gets its annual dust-off.
“Sell in May and go away, don't come back till St. Leger's Day” has been around for aeons, as have multiple variations thereof, including “Sell in May, Buy in November”, otherwise known as the Halloween indicator.
The amount of Google search web space devoted to this subject is staggering, upward of 320 million results, but I think it's a lot of nonsense, because for one thing, it really depends on what types of stocks an investor is exposed to.
Over the last five years, using the opening value of the FTSE100 on the first trading day in May and comparing it to the first trading day in September, I tested the saying, with mixed results, as I suspected.
Between May and September 2006, 2007 and 2008 the benchmark index was indeed lower on the 1st September by 117, 146 and 451 points respectively. This translated quite well across to the FTSE All-Share as well, which posted losses of 64, 77 and 257 points respectively.
However, in 2005 the FTSE100 was 495 points higher in September, than it was in May.
For the record, I will be surprised if the FTSE isn't lower in September, given where it is now.
Taking the analysis a step further, the results, when analysed on a sector by sector basis, were startlingly different. Over the same period the pharmaceutical sector posted gains in 2006 and 2008 of 238 and 1,263 points respectively. In 2007, the mining sector posted gains of 2,352 points, though these were completely wiped out the following year by a massive 3,342 point decline in the same four-month period.
The only major sector to match the FTSE benchmarks in its declines between these months was the banking sector, which posted losses of 67, 982 and 1,223 points in 2006, 2007 and 2008.
I also looked at the food and retail sector, as well as the oil and gas sector over this same period and found that they had both posted significant gains in at least one of these periods. In 2006 the food and retail sector climbed over 600 points and in 2007 the oil and gas sector rallied 384 points.
Without wishing to completely dismiss the foundation of this adage I think applying it in a blanket fashion across indices is a very simplistic approach, and there will always be exceptions to every rule. Markets can be cyclical as this adage proves, but different sectors have different cyclical factors and the price swings in between can be quite large.
Above everything else, it is important to have a coherent investment strategy with clearly defined goals. This more than anything else should maximise an investors profit potential and not reliance on old adages that sometimes work and sometimes don’t.
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