Technical Note 6 – ‘Sell in May…’ then live to regret it

The back to the market day is fixed, but when in May should you sell?

As the summer draws to a close I have taken some liberty with the definition of ‘technical’ – there’s not a lot of technical detail this month, so I hope you will enjoy this short story instead.

Whilst holidaying in northern France this year I drove through the quaint little village of Saint-Léger. A typical French village; one street of houses, one bar-tabac, one boulangerie and a proud Tricolore flying outside the Mairie. It brought to mind the old saying, ‘Sell in May and go away, don’t come back till St. Leger Day’, or words to that effect, and you probably know the (flawed?) logic behind it.

It dates back to the custom of aristocrats, merchants and bankers to leave the city and go to the country to escape the heat during the summer months. The St. Leger Stakes, being the last leg of the British Triple Crown, marked the end of the season and the time to go back to the desks. Markets tended to be flat or decline during this period of inactivity, hence the desire to take profits in May and buy again in the autumn. As with many of these aphorisms, there may be something in it. Research has shown that markets often perform more poorly over the summer months, but can twenty-first century investors really rely on nineteenth century sayings?

Well for one thing, this particular saying just isn’t precise enough for the modern trader. We know when St. Leger day is, it’s usually the second Saturday in September. So the ‘come back to the market’ day is fixed. But when in May should you sell? There are 31 days to choose from (or 21 trading days once weekends and bank holidays are accounted for). Do you choose the start of the month? Should you leave it as late as possible? Why not stick a pin in the calendar? So, I have run three scenarios. In each £10,000 of a Global Tracker fund is bought in January 2012, then sold in May and bought again on St. Leger Day (or at least the first trading day after St. Leger Day), and this pattern is repeated each year. Five years of trading and trying to beat the market.

The first scenario assumes you are brilliantly prescient and sell every May on the one day when prices hit their monthly peak. The second takes the guesswork out and assumes you pick the middle of the month every time (I’ve used the 15th). And the third says you’re as unlucky as Oliver Pugh* and sell on the one day when prices are at their lowest.

There is also the control that assumes you bought in January 2012 and sat on it, ignoring this hoary old saying. Running the risk of upsetting my brilliant colleagues who convert my scribblings for the website (apparently pictures are the devil’s own when it comes to formatting these pieces) here are the results.

It’s quite simple really. The blue line is the ‘buy and hold’ control. The green line is the brilliantly prescient investor, the orange line is the 15th of the month investor, and the red line is poor old Oliver Pugh. What is immediately clear is that the buy and hold strategy wins. In some years the May to September period shows some flattish results, and 2015 wasn’t such a good year, but what about 2016? Had you sold in May that year look at the profits you would have missed out on.

There’s not much more to say really. Another well-used saying sums it up admirably: ‘Time in the market is better than timing the market’.

*Oliver Pugh, who, according to the Daily Mail, is Britain’s unluckiest man, had to suffer three operations to remove a tumour that caused him to lose the use of his legs. He caught meningitis; then lost half his thumb in an industrial accident, picking up MRSA when the wound became infected; then his wife had an affair with his best man, and he suffered a heart attack (a broken heart he says).

Data sourced from FE Analytics based on investment in the Legal & General Global Equity Index fund.

Philip Chandler APFS, CFPTM, Chartered MCSI

Chair of Aspinalls Technical and Investment Committee