Sell in May

Causes

Data show that stock market returns in many countries during the May–October period are systematically negative or lower than the short-term interest rate. This appears to invalidate the efficient-market hypothesis (EMH), which predicts that any such returns (e.g., from shorting the market) would be bid away by those who accept the phenomenon. Alternative causes include small sample size or time variation in expected stock market returns. EMH predicts that stock market returns should not be predictably lower than the short-term interest rate (risk free rate).

Popular media consider this phenomenon each May, generally rejecting it. However, the effect has been strongly present in most developed markets (including the United Kingdom, the United States, Canada, Japan, and most European countries).

Academic response

Maberly and Pierce extended the data to April 2003 and tested the strategy for April 1982 through April 2003 except for two months, October 1987 and August 1998 (when markets crashed). They found the strategy did not work well in the time period April 1982–September 1987, November 1987–July 1998 or September 1998–April 2003. Other regression models using the same data but controlling for extreme outliers found the effect to be significant.

A follow-up study by Andrade, Chhaochharia and Fuerst (2012) found that the seasonal pattern persisted. In the 1998–2012 sample on average November–April they found that returns are larger than May–October returns in all 37 markets they studied. On average, the difference is equal to about 10 percentage points. The magnitude of the difference is the same in both studies. Further backtesting by Mebane Faber found the effect as early as 1950.

References

References

1. Twin, Alexandra. (1 May 2008). "Wall Street: Sell what in May and go away?". CNN.
2. "Welcome to the Best Six Months of the Year | Tumblr Photoset - Yahoo Finance".
3. "Sell in May and go away?".
4. "Sell in May and go away - part 2".
5. "Sell in May and go away - part 3".
6. (21 May 2019). "Sell in May and Go Away?". Bloomberg.
7. Maberly, Edwin D.. (April 2004). "Stock Market Efficiency Withstands another Challenge: Solving the "Sell in May/Buy after Halloween" Puzzle". Econ Journal Watch.
8. Witte, H. Douglas. "Outliers and the Halloween Effect". ''Econ Journal Watch'' 7(1): 91-98. [http://econjwatch.org/articles/outliers-and-the-halloween-effect-comment-on-maberly-and-pierce]
9. Mebane Faber. "Sell in May And Go Away Or The Seasonal Switching Strategy". [https://www.quantconnect.com/blog/history-of-non-market-data-correlations]