MW 'Sell in May and go away' comes early for some investors as April showers soak stocks

By Mark Hulbert

The stock selloff is pushing some investors to the exits. But the summer of 2024 was great for the market.

The "sell in May and go away" seasonal stock-market timing strategy may come early this year. In fact, some followers have already responded to the recent global market turmoil by going to cash almost a month early.

I'm referring to the six-months-on, six-months-off seasonal timing strategy that also is known as the Halloween Indicator. It is based on the historical tendency during some past decades for the U.S. stock market to produce the bulk of its average returns between Oct. 31 and May 1.

The strategy has struggled recently. Between May 1 and Oct. 31, 2024, a period when stocks were supposed to perform poorly, the S&P 500 SPX produced a phenomenal 14.1% total return. (That's unannualized; on an annualized basis, that's equivalent to more than 30%.) And since Oct. 31, 2024, when the stock market was supposed to begin a profitable stretch, the S&P 500 has lost more than 11%.

Though the "sell in May and go away" (SMGA) approach doesn't always perform this poorly, it has lagged a simple buy-and-hold for several decades.

A strategy that is 100% invested in 90-day U.S. Treasury bills between May 1 and Oct. 31, and fully invested in the S&P 500 during the other six months of the year, produced an 8.7% annualized return over the 30 years through March 31. That compares to 10.4% annualized gain for buying a S&P 500 index fund and holding. While the SMGA strategy was much less risky than a buy and hold, it underperformed on a risk-adjusted basis as well.

Ahead of the herd

One leading way in which advisers try to improve on the SMGA strategy traces to research conducted by Jeffrey Hirsch, editor of the Stock Trader's Almanac newsletter. Hirsch tries to get a jump on the mechanical SMGA strategy: Rather than always waiting until the end of the month, he often goes to cash in April when the market starts to lose momentum. Hirsch does the opposite in October to get back into stocks. To determine the precise days on which to pull the trigger, Hirsch relies on a trend-following indicator known as Moving Average Convergence Divergence (MACD).

In 2024, for example, Hirsch's approach went to cash on April 3 - almost four weeks before the end of month, when the mechanical SMGA strategy called for getting out of stocks. And last fall, Hirsch got back into stocks on Oct. 14, more than two weeks prior to the official Halloween re-entry point.

This year, Hirsch was again early. After the close of trading on April 3, he recommended that followers of his version of the SMGA strategy go to cash.

As the chart above shows, Hirsch's version of the SMGA strategy over the past five- and 10-year periods has failed to improve on the mechanical version of the SMGA - and significantly lags a buy-and-hold stock-market strategy.

Stay and play

An alternate strategy for exploiting the SMGA pattern is to not go to cash during the summer months and instead rotate into more defensive S&P 500 sectors. This approach traces to research conducted by Sam Stovall, chief investment strategist at CFRA Research. In 2018, he helped launch an exchange-traded fund to exploit his rotation strategy, entitled the Pacer CFRA-Stovall Equal Weight Seasonal Rotation ETF SZNE.

Stovall's strategy has the theoretical advantage of being in the market during bullish summers like 2024's, while simultaneously being cushioned against big declines. Though Stovall reports that in backtesting the strategy beat the market, it has struggled in real time. Since the ETF's launch in the summer of 2018, it has produced a 6.2% annualized return, less than half the 12.8% annualized gain over the same period of the S&P 500's total-return index (performance through March 31).

Note that, in order to calculate SZNE's trailing 10-year return for the accompanying chart, I chained together the ETF's real-time record with the results of backtesting back to 2015.

Midterm elections and markets

These results shouldn't be surprising, since there is no theoretical rationale (at least that I know of) for why the stock market should perform worse during summer rather than winter. The absence of such a rationale increases the likelihood that historical evidence in favor of the pattern is nothing more than a fluke.

The closest that researchers have come to discovering a rational for the SMGA strategy is that it traces to unusual stock-market weakness during the summer prior to U.S. midterm elections. This year is not a midterm election year.

The correlation between midterm elections and the SMGA pattern was discovered by Terry Marsh, an emeritus finance professor at the University of California, Berkeley, and Kam Fong Chan, a professor of finance at the University of Western Australia. Their study, entitled "Asset prices, midterm elections, and political uncertainty," was published in 2021 in the Journal of Financial Economics.

They reported that, other than over the 12 months beginning on May 1 of midterm election years, there is no statistically significant difference between the stock market's average summer and average winter returns.

So, you may have other reasons to reduce your stock holdings and increase your cash position, especially given the market's two-day plunge this past week. But the calendar shouldn't be a factor.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com.

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