Traders work on the floor of the New York Stock Exchange (NYSE) in New York, U.S., on Tuesday, April 11, 2017. U.S. stocks slid as investors assessed geopolitical risks and Federal Reserve Chair Janet Yellen's comments on the central bank's priorities. Photographer: Michael Nagle/Bloomberg
© Bloomberg

“Sell in May and go away” is not just a cliché. Soon it could be an exchange traded fund.

Those of us who dream of having a stock market index named after us are a little jealous right now of Sam Stovall, chief investment officer at research firm CFRA. After years of taking calls from clients at this time of year asking if they should follow the old market adage, he has turned his advice into an index. An ETF that tracks the CFRA-Stovall Large Cap Seasonal Rotation index cannot be far behind.

The first thing to say is that, no, you should not sell on May 1 and head to the Hamptons with your money in a suitcase. The US stock market tends to go up over the summer, just not by as much.

The pattern this past year has looked the same. In the six months from the end of April to the end of October 2016, the S&P 500 rose 2.9 per cent, while it is up 12.1 per cent since the start of November. The averages since 1970 have been 8.7 per cent for the winter half of the year, and just 2.8 per cent for the summer half.

You would not want to miss out on that 2.8 per cent. Substituting short-term Treasuries for the suitcase of cash still would not match staying invested in the S&P 500, so the question arises: what can be salvaged from the “sell in May” adage?

The answer is, it depends what you sell. While the most likely explanation for the seasonal divergence is a greater weight of money coming into the market in the early months of the year (think people saving their bonuses and tax refunds, or corporate pension plans being topped up), there also seems to be a greater level of investor nervousness over the summer, when defensive stocks have tended to outperform cyclicals.

Hence the make-up of Mr Stovall’s index: it tracks the S&P 500 consumer staples and healthcare sectors from May through October, before switching back into consumer discretionaries, industrials, IT and materials in November.

ETF or no ETF, that is something that investors could do themselves next week.


stephen.foley@ft.com

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