"Sell in May and Go Away" is an old Wall Street adage that refers to the stock market's tendency to weaken or decline from May to September -- but its accuracy has varied over the years.
Jeffrey Hirsch of the Stock Trader's Almanac noted in his latest annual tome on the subject that May and June have actually seen a number of disasters. For instance, the Standard & Poor's 500 fell in 15 of 20 Mays between 1965 and 1984.
What's important to remember about that period is that we were primarily in a secular bear market. The Dow Jones Industrial Average traded mostly between 500 and 1,000 from 1965 until 1982.
Compare that to the 1985-to-1997 secular bull market, where May was the best month of the year on average, with 13 straight gains. Hirsch also found that May has ranked particularly well in post-president-election years (like what we're in now). Since 1950, post-election Mays have been the fourth-best month of the year for the Dow, the third-best for the S&P 500 and the No. 1 best month for the Nasdaq Composite (since its 1971 launch).
Other studies seem to confirm at least some of "Sell in May and Go Away"'s accuracy. For example, a July 2003 analysis in Active Trader Magazine verified a downside bias in the late spring and summer, coupled with gains in late fall and winter.
Of course, history and tendencies are one thing, but an actual forecast for May 2017 would be better, right? So, let's look at what technical analysis has to say.
First, consider this chart of the advance-decline line (or "AD"), a leading indicator that has been around since the 1920s. The AD line typically leads a major stock-market top by four to six months. In this chart of the cumulative Advance-Decline data for New York Stock Exchange issues, we can see that the indicator just made a new high for the move up:
A peak now in the AD line might signal weakness beginning about four months from now in August. At the same time, a neural-network program that I've followed for over 20 years from Parallax Financial Research indicates a potential "trend change" for the DJIA on or about May 9.
Now, Parallax says a trend change can mean a turn from up to sideways rather than from up to down. So, with no top in sight on the AD line, any trend change in early May could just be a pause in the rally.
The bottom line is that while old sayings are nice, investors need to put them in context and evaluate aphorisms rather than just taking them granted. I don't anticipate an important peak in stock prices this May. If you're looking for a place to sell, I'd wait for a summer rally.
What Does Cramer Think About 'Sell in May and Go Away?'
(This column originally appeared at noon ET on Real Money, our premium site for active traders. Click here to get great columns like this even earlier in the trading day.)
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