Should Investors Drop the “Sell in May and Go Away” Strategy in 2020?

Sell in May and Go Away Internet Bull Report

An axiom among many stock investors is the “Sell in May and Go Away” strategy, whereby investors begin to invest in the stock market again in November. The Bank of America Corporation (NYSE: $BAC) states investors may miss out on a summer rally.

What is the “Sell in May and Go Away” Strategy?

This financial adage stems from the historical tendency of the stock market to produce its best returns between Halloween and May (winter months) and lower returns in the subsequent six months (summer months).

Some have attributed this phenomenon to investors and traders taking summer vacations, reducing market activity. 

A few other statistics to consider:

  • S&P 500 data collected from January 1928 through March 2020, shows an average November to April return of 5.1%, compared to a 2.1% return for May through October. 
  • The November-April period delivered positive returns in 65 of 91 years (71%).
  • The May-October period delivered positive returns in 60 of 92 years (65%).
  • During positive periods, the average November-April return was 11% versus 8.7% for May-October.
  • During negative periods, the average November-April return was -9.6% versus -10.4% for May-October.

The “Sell in May and Go Away” strategy does not work each year. The market has produced positive and high returns the past seven of the eight years. 


Sell in May and Go Away Internet Bull Report


It’s imperative to note that historical patterns and data are never entirely indicative of the future.

This strategy does not consider the performance of specific equities, current market or economic conditions, inflation, or interest rate movements. Political tension, and government actions, such as tariffs, can influence the market.

The Bank of America suggests selling in July or August.

According to the Bank of America’s publication on June 22nd, despite the S&P 500 recently stalling around the resistance level of 3,233, there is still room for a summer rally:

“Seasonality favors a summer rally as contrarian bullish Farrell Sentiment and futures positioning across large speculators, leveraged funds and asset managers suggest that the pain trade remains higher and equities continue to climb a perpetual wall of worry.”

The Farrell sentiment study is a market indicator that makes use of data from the American Association of Individual Investors, dividing the bullish percentage by the bearish rate plus half the neutrals. 

A bullish buy signal occurs when the 10-week average falls under 0.5 and rises from there. 

The Bank of America is now suggesting to sell in July or August as data demonstrates there is more upside for the stock market. Large speculators in the market have the “most aggressive net-short since February 2016,” according to Bank of America. 

Is this strategy only applicable during specific years?

New research from the University of Queensland in Australia and the University of California, Berkely, has found that this pattern is statistically significant for only the third year of a four-year presidential term.

During the other three years, the trend is statistically non-significant.

The data demonstrates that there is no historical rationale for the next six months to be any worse than the previous six months. This year happens to be an election year, meaning that the lower returns from the stock market in the winter months are not a reason for an investor to cash out in May.

Sell in May and Go Away - Internet Bull Report

Stocks have held up well during the six months before elections, with 2008 being the exception.

The S&P500 has an average return of 3.99%, and Dow Jones Industrial Average has an average of 2.64%; thus, both indexes have demonstrated positive returns during these six months.

Why is 2020 not like any other year?

2020 has been unpredictable and volatile in nature on many counts. The May-September slump may not appear this year. Mark Hackett, chief of investment research for Nationwide, stated that “little of this year has followed historical patterns.”


Sell in May and Go Away Internet Bull Report

It’s no secret that the central banks around the w
orld, including the Federal Reserve, are spending trillions on support packages. These loans have helped push interest rates lower and encouraged investors to take on higher-yielding stocks.

The pandemic has invited a surge of day traders such as Robinhood traders into the market through a mobile app. Quarantine measures left millions of people stuck at home, unable to attend casinos or partake in gambling.

Many inexperienced investors, such as the Founder of Barstool Sports, Dave Portnoy, turned to the stock market for entertainment purposes.

Robinhood reported an additional 3 million new accounts created in the first quarter of 2020. These rookie retail investors are more bullish than their institutional counterparts.

“The equity buying spree by the Robinhood community garnered a lot of attention recently and raised concerns about misplaced euphoria among ‘rookie’ investors.” – Emmanuel Cau, an equity strategist with Barclays.

Indeed, the most popular stocks traded on Robinhood have been the greatest winners in the market, and some millennials have had success stories such as 26-year old Lequon Godbolt, who gained $1500 in 24 hours by betting on airline stocks.

Data from Robintrack demonstrated that users increased their holdings while equity markets fell in mid-March, which proved to be a profitable move.

Unfortunately, the net Robinhood picks are underperforming, with many investors are getting the market wrong.

Bespoke Investment Group studied lowered-priced shares, often attracting retail investors. They discovered “small, active ‘gamblers’ are playing some role in market flows and performance as they look for ‘lottery ticket’ stocks.”

However, Barclays recently disputed that claim with their analysis stating, “correlation between the S&P500 rallying since mid-March and customer holdings jumping at the same time doesn’t necessarily mean causation.”

“Pointing to retail investors as the reason for a major market trend is never the full story,” states David Donabedian, the chief investment officer of CIBC Private Wealth Management.

Although the uptick in share prices cannot be wholly attributable to Robinhood traders, Barclays confirmed that they have impacted “slices” of the market.

The day trading is not the same as during the dot-com bubble in 1999, where the over-enthusiasm of internet stocks resulted in the misallocation of capital for retail investors.

Today’s Robinhood investors are typically buying a variety of low-quality stocks, priced around $5, with nothing else fundamentally in common.

There’s an expectation that once sports betting comes back online, the impact of retail investors will die down. However, these types of trader’s presence may provide a temporary upside for investors that have held their stocks past May, ditching the “Sell in May and Go Away” strategy.


Sell in May and Go Away Internet Bull Report

Should investors have sold in May? – It’s best to “Buy-and-Hold” Strategy.

Timing the market correctly is almost impossible, and unsuccessful timing has repercussions for many investors, costing considerable amounts of money. For retail investors, this type of timing rarely affords better returns as markets are generally efficient, and investors can expect that systemic opportunities are arbitraged away by professionals. 

If the driving force behind selling is fear, panic, or volatility of the future, the “Sell in May and Go Away” philosophy may work against you.

When fall comes around – and its time to repurchase the stock – stocks may have rebounded and prices risen, but you did not reap any of those benefits. You may even further postpone buying into the shares you once owned.

Sam Stovall, the chief investment strategist at CFRA, who calls himself a “big believer” in the seasonal trend of equities, stated that those who sit out in the market altogether in the “weaker months” [might] very well miss the “summer surge.”

Stovall suggests investors target cyclical sectors from November through April and hold onto defensive stocks such as consumer staples from May through October. 

Ultimately, timing the market based on seasonality is a proven losing game for long-term investors. The “Buy and Hold” strategy provides investors a more significant return, and Morningstar showed this by using compounding.

Time is the most powerful tool an investor holds; the greater the investment horizon, the higher the compounding interest received.

Morningstar found that if an investor started with a $10,000 investment in the S&P/TSX Composite in 1977 and used the “Sell in May, Go Away” strategy, they would have CAD$280,000 (US$204,582) – less  than their counterpart that remained invested the entire time.

Sell in May and Go Away Internet Bull Report

For retail investors, sticking to mutual funds or ETF’s while remaining diversified during this time is a recommended strategy by Jodie Gunzberg, chief investment strategist at Graystone Consulting, a Morgan Stanley business.

“While investing in a bear market may not be for the faint of heart, investing in index funds over the long term can help investors build a diversified portfolio at a low cost,” said Gunzberg

Investors should also be looking at stocks or funds in the financial and health sectors, “they look relatively cheap on current forward P/E relative to the 20-year average,” says Gunzberg. Back in July 2016 was the last time banks were this underweight, and their stocks nearly doubled over the next 18 months. 

For investors interested in investing in stocks rather than indexes, the Bank of America highlighted in their research note: 

In conclusion, the “Sell in May and Go Away” strategy might have seen the end of its days, for this year especially.

The more sophisticated investors should turn to fundamental analysis to determine their market position, while more juvenile investors should follow more passive trading strategies.


Sarina Gill

Equity Research Analyst

Sarina is entering her fourth year in the Rotman Commerce Program at the University of Toronto, receiving a Bachelor of Commerce with a specialization in Finance and Economics in 2021. During her undergraduate studies she has combined her passion for law and business and served as a leader in several law related clubs. Sarina’s passion for finance began in high school and since then she has followed the markets closely and written several articles related to market moves, corporate lawsuits and economics. Sarina worked as an Economic Development Intern where she spent the majority of her time researching the economic landscape of her regional municipality. When she is not studying or keeping up with the markets, Sarina enjoys spending time with her family and friends, cooking, and going to the gym!