An old Wall Street adage advises investors to sell in May and go away. Given that we have just turned the calendar to June, it’s worth assessing whether selling stocks and holding cash for the next seven months makes sense. The graph and data below are based on two trading strategies, both starting in January 1970.
The first is a simple buy-and-hold strategy. The second is the sell in May and go away strategy. This entails buying in January and selling in May. From May through December, the portfolio earns Treasury yields. The results may likely satisfy those following the sell in May strategy, as well as those who think it’s nonsense.
From 1970 to 2022, the sell in May strategy outperformed the buy-and-hold plan. However, over the last few years, the buy-and-hold strategy has performed significantly better. From a risk-adjusted perspective, sell in May is a more effective strategy. The Sharpe Ratio in the table represents the portfolio returns divided by its volatility. The higher the ratio, the greater the return per unit of risk. However, bear in mind that selling in May entails holding zero-volatility cash for more than half of every year.
A glance at the median, average, and period returns reveals that the buy-and-hold strategy is more effective when volatility is not taken into account. The bottom line is that it’s tough to compare the strategies. From a risk-adjusted return perspective, it’s worth selling in May. However, from a longer-term perspective, the data suggests holding.
Market Trading Update
As discussed yesterday, the market continues consolidating the May gains with the MACD “sell signal” now triggered. The good news is that consolidation is now allowing the weekly “sell signals” to turn higher, which may signal the end of the correction process in the next month, unless a larger reversal occurs. While there seems to be minimal evidence to suggest a larger drawdown, the risk is not entirely absent.
As we enter June, share buybacks are beginning to slow. As shown, there is a very high correlation between share buybacks and the direction of the market, given that buybacks add an additional buyer to the market. With companies going into “blackout” in the middle of June, that “buyer” will evaporate from the market before the beginning of the Q2 earnings season.
Does this mean the market will crash? No. However, it suggests that any weakness in the market, given the current overbought conditions, could be amplified until buybacks return in late July.
We remain bullish on the overall market, but are waiting for a better entry point to deploy the excess cash holdings in our portfolios. For now, the cash continues to provide a hedge against market volatility.