Sell in May and go away is not just a cliche. Soon it could be an exchange-traded fund. Those of us who dream of having a stock market index named after us are just a little jealous right now of Sam Stovall.
He's the Chief Investment Officer at research firm CFRA. And after years of taking calls from clients at this time of year asking if they should follow the old market adage to sell in May, he's turned his advice into an index. An ETF that tracks the CFRA-Stovall large cap seasonal rotation index surely can't be far behind.
Now the first thing to say is that no, you should not sell on May the 1st and head to the Hamptons with your money in a suitcase. The US stock market tends to go up over the summer, just not as much. Now, the pattern this past year is a case in point.
In the six months from the end of April 2016 to the end of October, the S&P 500 rose 2.9%. But it's up 12.1% since the start of November. The averages since 1970 have been 8.7% for the winter half of the year versus just 2.8% for the summer.
But you don't want to miss out on that 2.8%. Substituting short-term treasuries for the suitcase of cash still wouldn't match staying invested in the S&P 500. So is there anything to be salvaged from the sell in May adage? The answer is it depends what you sell.
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. But it does also seem to be a greater level of investor nervousness over the summer, which explains the lower returns.
Now, defensive stocks have tended to outperform cyclicals over those nervous summer months, which brings us to the make up of Mr. Stovall's index. It tracks the defensive S&P 500 consumer staples and health sectors from May through October before switching wholesale back into consumer discretionaries, industrials, IT, and materials in November. ETF or no ETF, that switch from cyclicals to defensives is something that investors could do themselves next week.