Chart of the Week: Sell in May

Here is the classic version of the Sell in May chart:


Source: Chart of the Day 


In 2004, we  noted you could Sell in May (but don’t go away) — part 2 is here — as a tradable bottom was forming; Markets bottomed for the pre-election rally in August.

In 2005, we repeated the same view. The market struggled upwards after the May lows, and made some progress (not a whole lot) until Katrina.

Selling in May this year turned out to be a
good strategy.

The bounce that started Wednesday can run for a coupla
weeks to a month or so, but should not be mistaken for anything but a
bounce. This ultimately implies a late Q3/early Q4 low


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Quote of the Day

In a Bear market, everyone loses. AAnd the winner is the one who loses the least.  -Richard Russell, Dow Theory Letters

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What's been said:

Discussions found on the web:
  1. GRL commented on Jun 16

    Hey, has anyone noticed what Poole and Kohn said today about inflation?

    From today’s WSJ online:

    Fed’s Poole Suggests
    Rates Could Rise
    If Inflation Persists


    “It’s, I believe, certainly my view that if the inflation rate continues to be persistent like this, the Federal Reserve will simply have to pursue persistently policies that will keep that inflation from increasing further,” Federal Reserve Bank of St. Louis President William Poole told reporters on the sidelines of a conference on monetary policy sponsored by the Bank of Korea.

    Earlier, Mr. Poole said that more attention should be paid to informal sources of information in addition to official data to determine the true extent of inflationary pressure.

    “Statistical studies to detect pass-through from recent energy price increases have failed to show significant effects in U.S. price data,” he said in an address to the conference. “But stories about widespread pass-through are becoming increasingly common.”

    “We may face more inflation pressure than currently shows up in formal data,” Mr. Poole said, emphasizing that his objective was “to make a general point and not to conduct a full analysis of the current situation.”

    And then, Kohn:

    Globalization has had a “gradual and limited” effect on U.S. inflation in recent years, Federal Reserve Governor Donald Kohn said Friday, cautioning that any disinflationary effect could reverse over time.

    “The effects of globalization on domestic inflation need not even be negative, especially in today’s environment of strong global growth,” Kohn said in remarks prepared for delivery to a conference sponsored by the Boston Fed.

    It looks like the BR view of official statistics understating inflation is starting to filter into the conventional wisdom, which means that, even if official statistics show inflation is low, that doesn’t necessarily mean the Fed will stop raising rates.

    The big question, is, if the Fed starts using “informal sources of information in addition to official data to determine the true extent of inflationary pressure” (quote from article), what sources are those going to be? Who gets to decide? What gets chosen and why?

  2. mentalmodel commented on Jun 16

    Apropos to the first link is this.

    Anyone know of some good recent articles on institutional herding?

  3. HT commented on Jun 16

    the s and p chart is either inaccurate/mislabeled or absurd. yes the gains are greatest Q4-Q1,but the ‘buy and hold’ curve is highest of all.

  4. jkw commented on Jun 17

    The chart is self-consistent. I can’t verify the accuracy. You would have made money over the past 60 years buying in May and selling in October (as long as you don’t adjust for inflation). It looks like about 90% of the gains are Nov-Apr and the other 10% are May-Oct. So the highest profit is from holding the whole time.

    The interesting thing is looking at the drawdowns. It looks like the difference between a secular bear and a secular bull is all in the summer months. Perhaps the winning strategy is always long Nov-Apr and going long or short for May-Oct based on whether you are in a secular bull or a secular bear. I’m eyeballing the return on that as at least 120% of buy and hold. And the way to identify a secular bear is that the May-Oct returns are 0 for several years before they go negative.

    But it also looks like Nov-Apr has been flat for the past few years while May-Oct has been positive. Perhaps something has changed?

  5. toddZ commented on Jun 17

    I think you’re crazy to call a few week/month bounce here… a two day rally into options expiration after a MONTH of selling doesn’t mean an extended pause in downside action.

    Foreign markets have cracked through all kinds of support and commodities (especially copper) still have a ton of unwinding to do. Crude has stalled at $70 and if money starts coming out of energy, we’re in for a shit-storm.

    The accelerated selling after that crazy 200 point up/down day last Thursday has me really believing the Bear has come back home to chase Goldilocks into the woods. If this was a simple correction that should have been the end of it.

    I think the Bear market is here, and I’m going to start selling short into the rallies.

  6. rick commented on Jun 17

    i was thinking the same thing, alot of risk trying to
    trade/long a topping market.

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