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Sell in May and Go Away: A Stock Trading Strategy

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Thursday, 28 April 2016 - Last Updated on May 1, 2016
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stock brokerApril is about to end and the month of May is fast approaching. How are your stock investments doing so far?

While it’s hard to predict the markets, when it comes to the month of May, one thing is for certain: You probably heard someone say, at least once, “sell in May and go away.” The cliché, which suggests that smart investors should sell off their portfolios in May and only re-enter the market in the fall, has long been part of Wall Street culture, but where does it come from? And why it is called such?

Sell in May and go away is a well-known trading adage which warns investors to sell their stock holdings in May to avoid a seasonal decline in equity markets. The “sell in May and go away” strategy is that an investor who sells his or her stock holdings in May and gets back into the equity market in November – thereby avoiding the typically volatile May-October period – would be much better off than an investor who stays in equities throughout the year.

Also known as the Halloween indicator, this trading strategy assumes that the period from November to April has significantly stronger growth on average than the other months. In such strategies, stocks are sold at the start of May and the proceeds of it are held in cash only to reinvest again by November.

This saying dates back to old England, when the stock brokers would go on summer vacation in May and not return until September. The original saying was, “Sell in May and go away, do not return until St. Leger’s Day. The final horse race of the season happened on St. Leger’s Day and the old time stock brokers didn’t bother getting back to work until the racing season had ended. The market in those days was pretty flat over the summer months.

Historically, according to the Stock Trader’s Almanac, the Dow Jones Industrial Average in the US has had an average gain of 7.5% during the November through April period and a gain of only 0.3% over the May through October period, going back to 1950 and there is a good correlation between US and Philippine stocks.

Over the years, During the May to October period, a major non-recurring event occurs that creates market uncertainty. The events happen when large institutional investors and traders are on holidays and liquidity in equity markets is diminished. Hence, stock prices are low.

The Philippines will be having its Presidential Election on May 9. The Sell in May and Go Away strategy might not be relevant this year. Investors and businesses with interests in the Philippines are following this presidential race closely, as the Philippines remains one of the fastest growing Asian economies. Regardless of which candidate is elected, investors face uncertainty. There is no ironclad guarantee that candidates will follow through on their campaign promises, honor the government’s contracts, or continue President Aquino’s so far effective economic policies and anti-corruption measures.

According to a poll released by Bloomberg, Grace Poe and Mar Roxas were selected by analysts as the most credible candidates. However, depending on the winning President, it might have an effect on stock prices.

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Photos from Pixabay. Public domain.
Tyrone Solee (27 Posts)


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