This seasonal pattern is one of the great enigmas of today’s financial markets and is undoubtedly another example of how difficult it is to find a logical explanation for many of the guidelines, which occur repeatedly in equity markets across the globe.
We can invest in international stocks to take advantage of this well-known standard, but it is important that we look for a cheap broker, according to the brokers we compare at Rankia, for both national and international stock exchanges, Degiro will be the cheapest for this type of investment. You can consult the article on the best brokers in Portugal at this link.
In order to approach this strategy, I will present the conclusions of one of the most complete studies on this seasonal pattern by academics Ben Jacobsen and Sven Bouman, published in the prestigious American Economic Review.
What is it and what is the origin of the phrase?
This seasonal pattern is based on the assumption that the profitability obtained in the October-May period is greater than the profitability that would be obtained in the rest of the year.
Therefore, the strategy to follow would be to invest or increase our positions in October and maintain them until May, where we recover the liquidity of our portfolios. Related to this guideline, we also find the Halloween Indicator proposed by Michael O’Higgins, which is based on buying on October 31 and selling on April 30.
The world of the Stock Exchange is a kind of twilight state at the moment. Potential buyers appear to have “sold in May and left”…. Financial Times, May 30, 1964, p. 2
This phrase is the oldest reference, found in the press, talking about this seasonal pattern. Since then, more than 150 investigations or publications have been prepared in several countries on this guideline.
Some of them added to the opening phrase of Sell in May and go away, the end of “but don’t forget to return in September” or “but buy again on St. Leger Day” (St. Leger Day refers to the date of a classic horse race in England every September).
Does this seasonal pattern really work?
The study is based on a series of data corresponding to the main indexes of 37 countries over several periods of time over 10 years. The results of the study are as follows.
As can be seen in the table, there is strong evidence that profitability in the months of October to May is higher than the periods from May to October. In particular, of the 37 countries analyzed in New Zealand alone, the opposite is true. At the same time, it shows that the effect is stronger in both European and emerging countries.
Another important factor to note is that the analysis of historical series in 10 countries with organized financial markets has shown that this pattern has been fulfilled for some centuries, for example, in the United Kingdom since 1694.
Although in the last 30 years the returns have been lower than those achieved in previous periods, in this case, Murphy’s Law is not fulfilled, since the standard continues to be fulfilled.
To analyze seasonality, it is advisable to use the Seasonality Chart tool , available on the StockCharts website , which allows a more detailed analysis of the periods and indices you want to study.
As we can see in the graph below on the return of the IBEX in the period 1998-2017, the lowest returns are concentrated between the months of May and September.
What is the cause of the satisfaction of this seasonal pattern?
Perhaps this is the point that most controversy generates around seasonal patterns. The study tries to verify one by one the possible explanations that have been given throughout history to explain this pattern. The most frequent explanations were:
The results are higher in this period because more risks are assumed
One of the theories indicates that the highest returns were a compensation for taking on greater risk. The study shows that, in most countries, the standard deviation in the two periods is very similar, even in several countries, the highest risk values are in the period from May to October (when the profitability is lower). Therefore, this hypothesis is rejected.
The pattern is nothing more than a derivation of the “January effect”
This hypothesis suggests that the high yields in the period are due to the seasonal pattern of January, according to which earnings on the stock exchanges this month are much higher than the rest of the year. The study analyzes income for the period excluding the month of January and still complies with the seasonal pattern. Therefore, this hypothesis is rejected.
Influence of interest rate developments:
The explanation is based on the theory that central banks offer lower interest rates during this period and tend to raise them between May and October. a statistical analysis was performed that showed that there is no such correlation.
Volume of business:
One of the most talked about is this explanation based on the fact that there is more trading volume in one period than in the other. The study shows that, although the trading volume is generally slightly higher from November to April in most countries, the difference is not significant enough to be considered valid.
Influence of the agricultural sector:
This hypothesis is based on the fact that the pattern is a consequence of the movement of a specific sector and not of a country’s global economy. Specifically, the agricultural hypothesis suggests that farmers apply for loans in late spring and summer to buy crop seeds; This demand for credit raises interest rates and creates a lack of liquidity in the market.
In the fall, when crops are harvested and sold and loans are repaid, interest rates fall and liquidity increases. To verify this assumption, it is analyzed whether in agricultural countries the effect is even greater. The results show that there is no relationship and even in less agricultural countries the effect is even greater. To exclude another sector, they carried out a study of cross-sectional data between countries and sectors and the result was the same:
Holidays and Vacations:
Another of the most popular explanations is based on the fact that with the arrival of summer and the increase in temperatures, the number of operational operators is significantly less. Even this theory also states that the diminishing effect in the last 30 years is due to the introduction of air conditioning units that allow work to continue in the “hot summers” of New York or London. The study shows that there is no relationship when the same effect occurs in the southern hemisphere when in the period from May to October are in the winter months.
Types of news:
At this point, they argue that the number of positive news is greater than the number of negative news in this period and vice versa. As expected, the results showed that the cause is also not present.
What was the result this year on the main indexes?
In the table below, we can appreciate the marked bullish character that the last 6 months had.
Undoubtedly and in view of the data, “Sell in May and Go Away” is a seasonal standard that is met in many countries and indices. Its cause remains a difficult puzzle to solve, while it is best to keep in mind when making our investments and thus obtain the best returns on our investments.
It is good to keep in mind that, in these investment strategies, one of the keys to success is having a broker that allows you to operate with low commissions, such as transaction or maintenance or custody. In this way, we can make the most of the profit that this strategy could offer us. For this, there are different brokers, such as Degiro, that allow us to operate in national and international stock markets at very competitive prices.