Market shaping up for 'sell in May and go away'
The run-up in share prices is leading some to believe that the old adage may play out this year, writes Nicki Bourlioufas.
The old adage “sell in May and go away” is based on a seasonal pattern of share prices peaking in April or May and dropping for several months before rising again in November. This year, with the run-up in share prices, it’s tipped that pattern could play out.
In the US, the seasonal phenomenon is linked to the tax year for mutual funds ending in September, which often prompts tax-related selling in August and September. In the UK, the phenomenon has been linked to agricultural merchants having to sell shares in August or September, says Shane Oliver, chief economist at AMP Capital. He says the seasonal pattern occurs in the US, UK, Asian and Australian markets.
Generally speaking, August or September are the weakest months on the ASX, while normally prices rise in the following months through to the new year. However, prices often rise in July too on tax-related buying after a drop in June linked to tax-related selling, says Oliver.
“There is a distinct seasonal pattern in share markets going back for many decades of markets rallying in October, November, December and January. On its own, you wouldn’t trade on it, but it is something to be aware of. But it’s not evident every year,” says Oliver.
Shane Langham, a senior private wealth adviser with PhillipCapital and founder of the Charting Wisdom share market report, has examined the phenomenon for data back to 1936 and in detail since 1980. He has found that it is evident in most years.
A peak in share prices is normally formed around mid-May and then from there the Australian share market works its way down into mid to late June. But share prices often lift in July in the new tax year.
“The ‘sell in May and go away’ saying does have some merit to it more times than not,” says Lanham.
“On average, we see tops forming on the 15th May which sells off into the 25th May. This has happened 64.10 per cent of the time and with an average move down of 2.13 per cent since 1980.
“Looking at the move down into the end of June we see tops forming on the 15th May which sells off into the 27thJune. This has happened 69.23 per cent of the time and with an average move down of 3.97 per cent since 1980,” says Langham.
“However, over this time if [the share market] fails to go down it’s been up an average of 4.65 per cent, so it pays to pay attention to the lead into these times to see if they are setting up correctly or not. Not all years are created equal.”
Langham says the phenomenon could arise this year given the strong rally. “If we are to see the ‘sell in May and go away’ [pattern], we normally see the Aussie market run up into the end of April to mid-May for this to play out.
“This year, we have had a stellar start to the year and have already rallied up 980.3 points or 18.1 per cent since Christmas Eve up into the recent top on the 24th April. Given the average annual gain in the Aussie market is 7.0 per cent, what we have already had is already over 2.5 times greater and we are only a third of the way into the year.
“So, in other words we have run up into this time nicely for the ‘sell in May and go away’ to play out as it has in the past.”
He adds, however, that July is one of the strongest months of the year “so I don’t look from May out to October as it would miss the July rally which normally sets up.”
But as both experts point out, the pattern doesn’t arise every year. Last year, if you had held on in May and sold in August then you could have made money, then bought back at the end of the year in December when prices were lowest, says Oliver.
In the US, recent research by Ladd Kochman and David Bray in their paper “Sell in May and Go Away Exposed! (2017)”, found that the annualised average return from the S&P 500 stocks for the November-April period was nearly six times greater than its May-October counterpart over the 20 years ending in October 2015.
Between 1995 and 2015, March-April and November-December had average returns of 5.11 per cent and 3.33 per cent, respectively. However, the study found a weak link. January-February, where returns over the 20 years averaged just -0.04 per cent.