Apparently, someone noticed that the stock market tends to slow down during the summer and start picking up again after Halloween, leading to November to April being the best period of the year for the market. That’s where the phrase “sell in May and go away” came from. The rhyme makes it catchy, doesn’t it? Should investors follow the “sell in May and go away” tip?
Does it apply to the Canadian stock market? I decided to investigate using iShares S&P/TSX 60 Index ETF (TSX:XIU) as a proxy. I’ll take a sample by looking at its one-year price charts between 2013 and 2023 starting on May 1. To keep it simple, let’s say someone was to follow the “sell in May and go away” strategy by selling on May 1 and jumping back in on November 1.
For 2013-2014, it didn’t really work out, as the stock market was higher in November than in May.
XIU May 1 2013-2014 data by YCharts
For 2014-2015, the stock market was roughly at the same level. So, it was a neutral result.
XIU May 1 2014-2015 data by YCharts
For 2015-2016, the stock market was lower in November, but the bottom came in early 2016.
XIU 2015-2016 data by YCharts
For 2016-2017, it didn’t work out, as the stock market was higher in November than in May. However, the market did head higher after that and went on sort of in a sideways range.
XIU 2016-2017 data by YCharts
For 2017-2018, in hindsight, selling in May was the right way to go, but investors were better served jumping back in September. If they waited until November, the stock market had already recovered. November through April also weren’t the best months, as the market dipped in early 2018.
XIU 2017-2018 data by YCharts
For 2018-2019, it was also correct to sell in May. However, the bottom came after November in December.
XIU 2018-2019 data by YCharts
We all know about the pandemic market crash that bottomed in March 2020. Selling in May and coming back in November would still have been disastrous for investors if they had a short-term investment horizon.
XIU 2019-2020 data by YCharts
In 2020-2021, the market was still recovering from the market crash, so it would have been silly to sell in May as the market continued to turn around over the next 12 months.
XIU 2020-2021 data by YCharts
And the market continued higher in 2021-2022.
XIU 2021-2022 data by YCharts
For 2022-2023, it was spot on to sell in May and buy back in November as rising interest rates triggered a market selloff.
XIU 2022-2023 data by YCharts
For four of the 10 charts above, selling in May and buying back in November at least sort of worked. This is but a small sample size. Perhaps it demonstrates that there’s a probability that “sell in May and go away” will sometimes work. However, there are always black swan or macro events that can throw a curve ball at the market, such as the pandemic with the economic shutdowns around 2020 and rapid interest rate hikes in 2022.
Moreover, if investors did sell, they would lose the income that they would otherwise generate from holding their investments. In addition, if investors are buying individual stocks that are driven by underlying businesses and the businesses are quality ones, it doesn’t make sense to try to time the market by selling and getting back in at a later time unless maybe the stock was way overvalued.
Instead, it’s a better idea to buy more shares when they are on sale and simply hold to grow your wealth. Surely, if a position becomes too large for your portfolio, it might also make sense to take some off the table to diversify the risk and invest in other areas.
