Sell in May and Go Away? No Way

One of the most widely touted market calendar myths is that you should "sell in May and go away." This system apparently worked well from 1950 until about 2003. The Stock Trader's Almanac has assembled data for all the midyear swoons since 1950, but I'd like to bring you the data before 1950 and since 2003.

Last week, S&P investment strategist Sam Stovall took a new look at the "Sell in May" theory, taking the data back to 1933 (through 2009). He discovered that the S&P 500 index gained 2.5% on average during the months of May through October. More importantly, Stovall also looked at the 15 years like this one - the second year of a bull market -- and he found that the May-October gains in all 15 of those instances (since 1933) averaged +5.5%. Only once (in 1971), did the May-October months deliver a major loss.

Main Street Turns the Corner (Forbes)

So far, so good, but I also want to look at what these calendar theories have done for us lately. It does no good if a system works in the distant past but then loses all validity once "everyone knows" about it. So I took a look at the last seven years in the Stock Trader's Almanac 2010 -- since the bull market of 2003 began -- and I found a nearly-identical track record in the two six-month periods -- i.e., cumulative gains of 13.75% and 13.91%, respectively:

A difference of just 0.02% per year is about as close as you can get to a dead heat. Last year, "Sell in May" certainly didn't work, since the S&P 500 gained 18.7% from May 1 to Oct. 31, 2009, and it added another 14.5% in the six months ending April 30, 2010. But what about the next six months?

Fundamentals Point to a Higher Stock Market

The major worries for investors now seem to be (1) the "euro crisis" centered in Greece, but in danger of spreading to the Iberian peninsula; (2) China's inflationary boom threatening to collapse into a deflationary bust, similar to the West's 2008 crisis, and (3) the Goldman Sachs (GS) war on Capitol Hill.

The first two dangers are actually good news for the U.S. stock market. Troubles elsewhere will help us outperform Europe and Asia, supporting the U.S. bond, currency and stock markets as a safe haven. April is a good example of that trend. The U.S. market rose 1.5% in April vs. just 0.1% gain in the MSCI World Index. Emerging Asian markets only rose 1.1% in April, and China's market is down 14% year to date.

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