Dear Mr. Market:

Are you finally about to let off some steam and come back down? Everybody has been talking about this market correction but until last week you’ve been awfully stubborn and just keep inching higher. It’s now April 8th, so albeit a few weeks early, can we at least ask you about this whole “Sell in May and Go Away” concept?

For those that may not be aware of the old Wall Street adage, “sell in May and go away”, it is a belief that the market performs better in the months of November to April. Those that follow this strategy ideally sell their stocks in May and stay in cash until about Halloween. Does this have any merit? We wrote about this last year and wondered if it was once again data mining and essentially a statistical fluke. Analysis by Ben Bouman and Sven Jacobsen (2002) actually confirmed about 10% percentage points of stronger performance in 36 of the 37 markets they studied for the November-April time period. These results were more pronounced in the European economies. Other studies also point to the Dow Jones averaging about a gain of 7.5% in the Winter months while the Summer months lost 0.1%.

There are a number of factors on why this trend seems to have been fairly reliable dating all the way back to 1950. Year-end bonuses and the proverbial “Santa Claus rally” can sometimes help bump the markets up in the Winter months. Barring any unexpected negative catalyst and a typically mild Spring, the “summer doldrums” set in after all the first-quarter results are announced. Like it or not the extensive media coverage can really amplify an earnings miss or a hit and it’s not inconceivable to see a company drop or rise by 20% during this time. Today will bring us Alcoa Inc.’s results and officially kick off the earnings season. Continue reading →