The market's recent action could strengthen the odds that the well-known trading adage, "Sell in May and Go Away" holds true this year. That's because a technical trigger known as the "Moving Average Convergence Divergence sell signal" is poised to turn positive -- indicating that it's time to sell, according to Jeffrey Hirsch, editor-in-chief of the Stock Trader's Almanac.
"Look for a technical trigger and readjust the portfolio," Hirsch told TheStreet.
"Sell in May and Go Away" refers to a six-month switching strategy in which fund managers and investors cut their losses and tighten up their portfolio right around May 1. That's because the Dow Jones Industrial Average historically performs worse between May 1 and Oct. 31 than it does in the year's other half. According to Stock Trader's Almanac data, the DJIA gained a total of 17,992.8 points between Nov. 1 and April 30 in the 66 years between 1950 to 2015, while the remaining May-through-October months gained only 433.5 points:
In full, the saying goes, "Sell in May and go away; Don't come back until St. Leger's Day." St. Leger's Day refers to the third horse race in the British Triple Crown, which takes place in September. Hirsch said this old English saying highlighted selling stocks ahead of the London social season, as Europe is in general quiet during the summer. In the United States, the rhyme didn't become relevant until after World War II.
The expert said he thinks the saying "is true in general, and setting up rather nicely this year." He noted, however, that world events can cause the market to shift.
"[It] depends on the numbers that come out and the activities that come out of Washington, other countries, and companies," Hirsch said. "The less they do, the happier the market is."
To be sure, after the U.S. dropped the "Mother of All Bombs" on an Islamic State target in Afghanistan, the DJIA closed the shortened holiday week in April beneath its Bollinger Band and the CBOE Volatility Index (VIX) spiked. These signals, historically suggest the Dow will rally, according to Cincinnati-based Schaeffer's Investment Research. (The Bollinger Band is a technical indicator which measures relative volatility -- many traders use it to determine overbought and oversold levels.)
Still, Hirsch is optimistic that the saying will hold true this year. He anticipates a bounce in the Dow at the end of April and/or beginning of May that "will likely lead to a sell signal."
The critical reference point for the adage is the MACD. A traditional sell signal occurs when the MACD line crosses below the signal line. Hirsch begins looking for the MACD sell signal at the beginning of April, and said it's "just about turn positive."
Hirsch stressed that "Sell in May and Go Away" doesn't mean investors need to sell bets in the DJIA on May 1 or even May 15. It means to sell when the MACD drops below the line -- and that could even happen in April.
But investors should not just "go away," as there are still buying opportunities during these months.
Investors should consider going long in two sectors, utilities and bonds, according to Hirsch. Bonds are a natural buy as the Dow slumbers through summer. Utilities, meanwhile, experience a seasonal benefit. People use air conditioning and still require lights among other seasonal energy production. Pre-planning for the heating season may even happen as November approaches.
"Look to short overvalued stock, one that is dropping in revenue," Hirsch added.
A recent study suggests, however, that while stocks generally tend to perform better in the winter than in the summer, the advantage comes during the third year of the presidential four-year term.
"During the other three years of the four-year term, in contrast, the pattern is statistically non-existent," wrote Mark Hulbert, founder of Hulbert Financial Digest.
Hirsch disagrees with this finding, noting that May has historically been a solid month in post-election years.
"In the years since 1997, May's performance has been erratic; DJIA up nine times in the past nineteen years (three of the years had gains in excess of 4%)," Hirsch wrote in a post for the Stock Trader's Almanac.
But generally, the May-through-October months are when the market tends to pause and be more prone to downside action, Hirsch said.
Sell in May and Go Away:
- 'Sell in May and Go Away' Won't Work for Gold
- Sell the Dollar in May and Go Away
- Sell in May and Go Away ... Into These 4 Alternatives
- Sarge: I'm Not 'Selling in May and Going Away'
- Complete Coverage: 'Should You Sell in May and Go Away?'
Employees of TheStreet are restricted from trading individual securities.