Sell in May and Go Away? A Look at Global Market Seasonality

The old adage is “Sell in May and Go Away” – but does this also apply to investors in foreign markets?  Sy Harding takes a look at the seasonality of financial markets beyond US soil in his weekly column…

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Being Street Smart

Sy Harding

Seasonality and Global Markets

May 27, 2011

When investors think of the stock market’s annual seasonality, as expressed by the adage ‘Sell in May and Go Away’, they usually relate it to the U.S. market.

But in fact the historical pattern of stock markets making most of their gains in the winter months, and experiencing most of their bear market declines and corrections in the unfavorable summer months, is also common in global markets as well.

Since investors have become much more comfortable with investing in global markets in recent years, in fact have poured money into emerging markets at a record pace, recognition that the seasonal pattern is global is potentially of considerable importance, especially this year.

A 27-page academic study conducted at the Rotterdam School of Management in the Netherlands and published in the American Economic Review in 2002, concluded, “Surprisingly we found this inherited wisdom of Sell in May to be true in 36 of 37 developed and emerging markets. Evidence shows that in the United Kingdom the seasonal effect has been noticeable since 1694. . . . A trading strategy based on this anomaly would be highly profitable in many countries. The average annual risk-adjusted outperformance ranges between 1.5% and 8.9%, depending on the country being considered. The effect is robust over time, economically significant, unlikely to be caused by data-mining, and not related to taking excess risk.”

Stock markets outside of the U.S. seem to be significantly in the lead on the downside in this unfavorable season. For instance, the S&P 500 is only 2% below its recent top on April 29, the last trading day of April (potentially in keeping with the ‘Sell in May and Go Away’ rule to sell on May 1).

However, in the rest of the world quite serious stock market corrections are underway. The important markets of China (the world’s 2^nd largest economy), Japan (the world’s 3^rd largest economy), Hong Kong, India, Brazil, and Russia are already down an average of 12% from their recent peaks, and have broken down through key support levels, including their long-term 200-day moving averages. Other important markets, including Mexico, Canada, Britain, France, and South Korea have already broken down through key intermediate-term support levels, including their 20-week moving averages.

That global markets are so far ahead of the U.S. market on the downside leads me to believe they will become oversold first and perhaps be the first to bottom and turn back up when the time to buy arrives again.

Meanwhile, the studies of seasonality point out that a seasonal investor outperforms the market over the long-term (occasional years when it does not work notwithstanding), while being at risk in the market only six months each year, and moving to cash for the other six months.

They do not take into consideration the additional gains the seasonal investor can make in the unfavorable season in areas other than cash.

To name a few; bonds, gold, and currencies often move independent of the direction of the stock market, and can rally when the stock market is in a decline. And all are easy enough for investors to take advantage of via mutual funds, and even more efficiently via ETFs (exchange-traded-funds).

If seasonal investors are fluent in market analysis, particularly technical analysis, which can help define when an unfavorable season will not just be a ‘dead zone’ but will probably see a substantial correction, significant gains can be made from the downside even faster than from the previous rally period. That’s because when the market goes down it tends to go down much faster than it went up, often losing a year of previous gains in a matter of a few months.

And holdings are available to harness the power of such market declines, including ‘inverse’ mutual funds and ‘inverse’ ETFs, which are designed to move opposite to a particular market or market sector.

In my opinion then, the U.S. market has some catching up to do on the downside, while selected global markets, considerably ahead of the U.S. market on the downside, are liable to bottom first and provide the earliest buying opportunities.

In the interest of full disclosure, I and my subscribers have some recent new positions in a bond ETF, a currency ETF, and selected inverse ETFs against the U.S. market.

Sy Harding is editor of the Street Smart Report, and the free market blog, www.streetsmartpost.com.