A pattern well known to stock market investors
There is a pattern well known to anyone who trade in financial markets, which says “sell in May and go”. The first time I heard her was 11 years ago, when she was studying for Stock Market Licenses in Madrid.
One day I was waiting with a coffee for them to call me to take the final exam and an older man came up. Every day there was a group of older people who were there looking at the quotes and talking. The man stood next to me to discuss companies. It was 2011 and everything was very mixed up.
We were talking and since it was May, he told me something like it was the month to sell everything and not return until October. That idea was always hanging around in my head.
I have read that sentence many times since. But is this real? Why sell and not come back until October? Let’s put opinions aside and let the numbers show us if this makes sense.
1. The seasonal pattern behind this strategy
A seasonal pattern is a pattern that works over a specific period of time.. For example, the Christmas rally.
Here, it seems that we find a clear pattern as well.
First let’s try seeing what happens if we are in the market (SP&500) from May to October in the last 72 years:
The truth is that it does not seem like a very good idea to be in the market here. Lots of exposure and little profit.
2. Sell in May
Now we will see the opposite (what the man was saying).
First we see the results buying in October through December:
And now from January to May:
It certainly seems like a better idea. buy in october and sell in may.
3. The last years
Markets change, so in addition to using all the history, what we are going to do is analyze the last ten years.
Be careful, because in recent years being bought from May to October has not been such a bad idea:
Now we will see from October to December:
And from January to May:
The sudden drop that you see in the previous image was due to the covid in 2022.
As you can see, in recent years this pattern has not been as evident because the markets have not stopped rising. They have literally been doped by the stimuli.
4. Why sell in May?
It is not so much selling in May as the positive effect that the guidelines of the black friday and the Christmas rally that takes place outside the summer months. One idea if you want to limit market exposure is to take advantage of these patterns specifically.
The pattern works but we have seen that in recent years the advantage has not been so evident.
5. How does this work in other markets?
In a very similar way. Here you have the behavior of the Dow Jones index from October to December:
And here from January to May:
The summer months do not suit him very well either, analyzing the entire history:
In the last 10 years the results are very similar to those of the SP&500.
6. Can a trading system be created to take advantage of this?
It can. You can even build a portfolio of systems to take advantage of these types of seasonal patterns.
If you want to learn how to do it, check out this free class.