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Monday, May 04, 2009

Sell in May and Walk Away

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(Tickers: DIA, SPY, DOG, SDS, NYSE: QLD, Nasdaq: QQQQ, NYSE: NYX, IWM, TWM, IWD, SDK)

famous Greek Americans ChiosThe beginning of May is known for many varied things. First of all, May Day, celebrated on the first of the month, marks most of the world's version of our Labor Day. Later in the week, the festive Cinco de Mayo offers an enjoyable opportunity to celebrate Mexico, though the holiday has been distorted in the US, as holidays often are here. Trust me, it has nothing to do with tequila shots, and much to do with a great victory of an outnumbered Mexican army.

The Kentucky Derby is run on the first Saturday in May. This has always been a treasured weekend for your favorite financial markets blogger, who happens to enjoy horse racing and celebrates his birthday in May as well.

Sell in May and Walk Away


Financial markets enthusiasts know May in another way. Around the time the flowers bloom, you'll catch traders and talking heads reciting an old worn out Wall Street adage. The pinstripe pipers ritualistically call out, "Sell in May and walk away." Well, it rhymes, so it must be true right...

As it turns out, the adage holds some weight. Since World War II, the performance of stocks in the period running from May through October has been relatively weak versus the November through April span. There are various theories for why this is so, mostly keyed on fund flows and natural human instincts. Let's face it, we live differently from season to season, and some patterns hold true through the years and even through generations. As scientifically as we would like our lives and stocks to be, we can never discount our human characteristics, which skew patterns and break molds.

We enjoy the sun, the lamp of our life. We spend more time under its light and warmed by its rays starting in May. Like the birds, we live and we love... and we give less focus to our portfolios. As a matter of fact, we may draw from them to support our summer flings, and money-draws force securities sales.

In the other half of the year, just as farmers harvest, squirrels gather nuts and bears glut, we also concern ourselves with matters of not so dissimilar survival. At the turn of the year, tax considerations, IRA & pension fund contributions and tax refunds dictate the capital pace toward gathering and investing, and thus, drive the purchase of securities.

Efficient market theory holds that predictable patterns like these should flatten out over time, because no arbitrage opportunity can last as it becomes understood by the masses. Investors will bet on it, and so it will evolve and eventually disappear. I have long held among friends and colleagues that the January Effect itself is on its last legs. Intelligent investors have gradually trended toward earlier and earlier buying, and so the "Effect" evolves and eventually the opportunity is spread out, and finally worn out.

With the participation of short sellers in the marketplace, the same should hold true with regard to the May adage. Now, of course every year is not alike, and this particular period is extremely unique. However, given the recent run up in stocks, a burgeoning exogenous threat in the new viral killer, and ongoing reasons for economic concern (namely increasing unemployment and related unrest), the old adage seems to have a good chance to ring true this year. So then you might at least consider the idea to "sell this May and walk away."

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