Sell in May? Stock market myth or reality?

When it comes to the stock market, the old adage Sell In May return on St Ledger's Day seems to be one of those beliefs that has stuck around and stood the test of time, at least in terms that many seem to take it for granted that it is true. It appears to be like one of those sayings in life that no one ever questions, investors and traders will often refer to the old "sell in May" without ever having looked into whether it is backed up by hard data.

How did the saying come about?

The origins of the phrase date from the time when the City was full of toffs who became more preoccupied with the social whirl in the summer – the Chelsea flower show, Wimbledon, Royal Henley, Royal Ascot, the Epsom Derby, Cowes (not necessarily in that order) , and finally the St Leger classic at Doncaster – than earning money in the stock market.

http://www.proactiveinvestors.co.uk/companies/news/56550/sell-in-may-regret-by-september--56550.html

So, to some degree the idea of selling in May and being out of the market for 3-4 months as a good strategy appears to be based on the notion that the market heavyweights are away during that time. In other words, most of those with money in the city are too busy on holiday spending it to be bothered with market matters. A little simplistic maybe, but that appears to be the general gist of the argument.

What does the data say?

Datastream provide historical financial data to the City and they have come up with a number of interesting truths about "Sell in May"when applied to the UK.

• In the 21 years prior to Big Bang 1986, the FTSE All Share index was higher by mid September in 15 of those years.
• In 1974 it would have worked well as the market fell 41.6% between May and September.
• In 1975 however, you would have missed out on a 107.4% increase between May and September.
• In just 14 of the 47 years since 1966 has the market been lower by mid September than in May.

http://www.proactiveinvestors.co.uk/companies/news/56550/sell-in-may-regret-by-september--56550.html

Evidence seems to suggest that when it comes to selling in May, anyone taking the advice is more likely to miss out on potential gains. If you are waiting for a market correction you have about a 1 in 3 chance that the market will be lower come September than now and the chances are that even if it is it's not likely to be at a crash level lower.

Perhaps this year will be different? After all, the market has had a pretty good run for the last 6 months without any significant correction. Also, the market might need a pause as we head into the end of year, which traditionally has been good for shares as we finish with the Santa rally. At some stage we are likely to see a correction, but data would suggest that we shouldn't count on the old "Sell in May" to provide it and maybe it is something that we should just forget about and ignore like an old wive's tale.