Sell in May

Sell in May...

and walk away

One Wall Street saw advises traders to "sell in May and walk away." Conventional wisdom holds that May through October are the six worst months of the year as far as making money in the stock market is concerned.

I didn't set out to follow the adage, but it worked out that way. My portfolio increased smartly in value for the first four months, but has been reduced to three positions, one of which is already on offer. As I have taken profits (and dumped a few clear losers), there just have not been that many promising candidates to take their place.

As with a lot of conventional wisdom, there's just enough truth in this old saw to make it dangerous. As the wag said, "so much of what we know ain't so." The chart below shows the average yearly cycle of cumulative returns for the Dow Jones Industrial Average.

Dow yearly cycle
Yearly cycle of the Dow Jones Industrial Average

It is true that the periods of sharpest increase tend to occur during the beginning and ending months of the year (outlined sections of chart), particularly if you look at recent history. But whether you look at the green line (1990s) or the blue line (all years) you can see that the DJIA rises fairly steadily well past May: until mid-July for the decade of 1990s. If you sold and walked away in May you would leave a lot of potential profit on the table.

On the other hand, if you took new positions at the beginning of May and held through October, the returns would not be very impressive, which is the kernel of truth behind the adage.

But as every prospectus says, past performance is no guarantee of future results. Stay tuned! I intend to play, if I can find promising candidates.