Fundamental analysis Macroeconomic indicators

Is the Strategy “Sell in May and Go Away” Effective?

Anton Volkov 22 december 2021 201 4

Detection of seasonal variations in stock market development is well-known among investors and traders as a way of promoting trading efficiency. In this study we are going to look at one of the most popular seasonal strategies in the stock market – “Sell in May and go away”.


The strategy “Sell in May and go away” suggests a share buy at the end of the October/the beginning of November with a subsequent sale at the end of April/the beginning of May. Specific dates of buy and sale may differ in different sources root back to the English proverb: «Sell in May and Go Away, and Come on Back on St. Leger’s Day». Originally, the frameworks for investors outside the market (as an option: restatement from stocks to bonds or the use of bank deposits) are limited by May, on the one part, and by the period from the middle of September until the beginning of November, on the other part. Currently, two time intervals for half a year are tend to be considered for a more accurate comparison of the strategy “Sell in May and go away” and the simple retention of long position (the strategy “buy-and-hold”):

  • The period from November until April: buy and hold shares
  • The period from May until October: sale shares and the position outside the market


In terms of the behavior of market members, the strategy “Sell in May and go away” is illustrated by a simple pattern: many traders and investors leave the market or shift to conditionally risk-free instruments in summer periods. As a result, the stock market moves on to fall, or becomes flat. In autumn after holidays, the activity level of market participants increases that leads to price increase.


Hypothesis
To conclusion

The strategy “Sell in May and go away” is more effective in comparison to the strategy “buy-and-hold” in the US stock market.

To conclusion
Data used

The historical data of index quotes S&P 500 and the main stocks are sectorial of the stock market of the USA: 2 shares from each sector with the highest capitalization.

  • Sector S&P 500 Information Technology: Microsoft, Apple.
  • Sector S&P 500 Health Care: UnitedHealth, Johnson & Johnson.
  • Sector S&P 500 Consumer Discretionary: Amazon, Home Depot.
  • Sector S&P 500 Industrials: Union Pacific, Honeywell.
  • Sector S&P 500 Consumer Staples: Walmart, Procter & Gamble.
  • Sector S&P 500 Financials: Berkshire Hathaway, JPMorgan Chase.
  • Sector S&P 500 Materials: Linde, Sherwin-Williams.
  • Sector S&P 500 Energy: Exxon Mobil, Chevron.
  • Sector S&P 500 Utilities: Nextera Energy, Duke Energy.
  • Sector S&P 500 Real Estate: American Tower, Prologis.
  • Sector S&P 500 Communication Services: Walt Disney, Comcast


Timeframe – month.


The period: for S&P 500, the period is since 1970 until October 2021.


For S&P 500, we have 612 values, which represents, 51 full years of data of our research.

Since the strategy implies a period of investment, going beyond one calendar year, the comparison will be complied on the basis of periods instead of calendar years: for example, the period from November 1970 until October 1971 and so one.


Analysis of the results


To estimate the effectiveness of the strategy, it is necessary to get calculations of the following indicators: rate of return, middle drawdown and maximum drawdown. The comparison of these indicators with the results of simple purchase retention for the period under review is conducted after the calculations.


  • Rate of return for the strategy “Sell in May and go away” for each period is calculated, using the next formula:

Ds = (P1 - P0) * 100% / P0,

where:

P1 – the price of closing the period (on the closing of the last trading day of April)

P0 – the price of opening the period (on the closing of the last trading day of October)


  • Rate of return for the strategy “buy-and-hold” for each period is calculated, using the next formula:

Db = (Pt1 – Pt0) * 100% / Pt0,

where:

Pt1 – the price of closing the period (on the closing of the last trading day of October in the first year)

Pt0 – the price of opening the period (on the closing of the last trading day of October in the base year)


  • Middle drawdown (AD) reflects the average losses at the closing of losing trades for the whole trading period expressed as a percentage. The lower middle drawdown level, the less are losses, and the better the trading signals operates.

AD = | Σ D (-) / n |

where:

n – the number of losing trades;

D (-) – rate of return of losing trades.


  • Maximum drawdown (MD) is a maximum from losses at the closing of losing deals for the whole trading period as a percentage (minimum rate of return). The lower maximum drawdown level is, the better the trading signals operates.

MD = | min (D) |


For the S&P 500, the strategy “Sell in May and go away” shows the average income rate which is 2,1% lower compared to the strategy “buy-and-hold”. It should be noted, however, the half-yearly progress of the strategy “Sell in May and go away” when the rate of return transfers into annual interest (the half-year progress doubles) shows the profitability which is 5,18% higher than “buy-and-hold”. The indicators of the middle and maximum drawdowns for the strategy “Sell in May and go away” show significantly less volatility than for the strategy “buy-and-hold”.

For Microsoft and Apple’s shares, the strategy “Sell in May and go away” shows almost half of the profitability of “buy-and-hold”; in annual interest, the profitability of the strategies is comparable. The middle and maximum drawdowns in the strategy “Sell in May and go away” show significantly less volatility for Apple’s shares; in the case of Microsoft’s shares, the indicator of the middle drawdown does not differ as largely. Therefore, it is not necessary an indication of effectiveness of the strategy “Sell in May and go away” for Microsoft.

For UnitedHealth and Johnson & Johnson’s shares the situation is similar to Microsoft: half of the profitability excluding the annual interest with a comparable level of the middle drawdown. The strategy “Sell in May and go away” for these shares shows low efficiency.

For Amazon and Home Depot’s shares, the strategy “Sell in May and go away” shows low efficiency: rate of return excluding annual interest significantly inferiors to the simple hold of long positions in markets.

The strategy “Sell in May and go away” for shares of the industrial companies Union Pacific and Honeywell shows high effectiveness. This strategy turned out to be more effective for Honeywell by all accounts of profitability and drawdown.

For shares of the companies, representing the sector of consumer staples, the strategy “Sell in May and go away” loses to simple hold of position in the average income rate. The strategy is ineffective for Procter & Gamble’s shares by all accessed indicators.

The shares of the financial sector show the opposite results. The strategy shows low efficiency for Berkshire Hathaway, while JPMorgan Chase’s shares demonstrate a comparable average income rate with a significant smaller drawdown. Thus, the strategy “Sell in May and go away” is effective for the shares of JPMorgan Chase.

Shares of the materials sector Linde and Sherwin - Williams show average effectiveness of the strategy “Sell in May and go away”: a comparable rate of return with significantly less drawdown (for Linde) and a similar drawdown level in the strategy “buy-and-hold” (for Sherwin - Williams).

Shares of energy sector Exxon Mobil and Chevron showed a highly efficient use of the strategy “Sell in May and go away”: the average income rate is comparable to the simple hold of position, while the level of drawdown is significantly decreased.

For the strategy “Sell in May and go away”, the use of stocks of public utility companies Nextera Energy and Duke Energy is turned out to be ineffective: the strategy showed low efficiency, even after accounting for the profitability, calculated as an annual interest.

The shares of companies of the real estate sector American Tower and Prologis didn’t show high efficiency from using the strategy “Sell in May and go away”: the level of drawdown significantly decreased but the profitability also showed a great decline.

The strategy “Sell in May and go away” has shown a great effectiveness for the shares of Walt Disney: by all analyzed indicators, the strategy surpassed the simple holding of the long position. The strategy showed low efficiency for the shares of Comcast: the average income rate is significantly inferior to the “buy-and-hold”, while the drawdown level declined less significantly.



Strategy “Sell in May and go away” helps to decrease the trading volatility significantly with the comparable rate of return.


At a level of single stocks, the strategy “Sell in May and go away” has shown mixed results.


The strategy is turned out to be effective for shares of Honeywell and Walt Disney by all analyzed indicators.


The strategy usage for shares of Union Pacific, JPMorgan Chase, Linde, Sherwin – Williams, Exxon Mobil and Chevron showed high effectiveness.


Ineffectiveness of the strategy has been identified for shares of Procter & Gamble, Nextera Energy and Duke Energy.


The strategy “Sell in May and go away” has shown results similar to the strategy “buy-and-hold” for other shares, considered in this research.

Conclusion

The effectiveness of the strategy “Sell in May and go away” for the stock market of the USA on the example of the index S&P 500 has been identified.

The detailed results are provided in the application:

XLSX (0.05 MB)Application to the article 'Sell in May and go away' S&P 500.xlsxXLSX (1.03 MB)Application to the article 'Sell in May and go away' US shares.xlsx

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