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Monday, May 4, 2009

Sell in May? No Way!


Today we'll analyze the "sell in May, Go away" axiom. It makes perfect sense that the market would consolidate starting in May as many investors/brokers/money managers etc... take their summer vacations. But what about for the month of May after the recession has been declared over? So to test the old theory I have built an Excel spreadsheet with the S&P 500 data downloaded from January 1950 until April 2009. First I calculated the average for all 59 months of May from May 1950 to May 2008. I then calculated and average for the months of May following each recession's declared end. The list of recessions used are as follows (date declared start - date declared finished):

JULY 1953 - MAY 1954
AUGUST 1957 - APRIL 1958
APRIL 1960 - FEBRUARY 1961
DECEMBER 1969 - NOVEMBER 1970
NOVEMBER 1973 - MARCH 1975
JANUARY 1980 - NOVEMBER 1982
JULY 1990 - MARCH 1991
MARCH 2001 - NOVEMBER 2001

Therefore the months of May used for this analysis were: May 1954, May 1958, May 1961, May 1971, May 1975, May 1983, May 1991, and May 2002.

All returns are the average for the months of May in the S&P 500:
Overall average From January 1950-April 2008 (59 Mays) is +0.33%
Excluding the months of May directly after recession is declared over (51 Mays) is +0.21%
Months of May directly after recession is declared over (8 Mays) is +1.08%

***NOTE*** If we exclude May 1954 since the recession was declared over in May 1954, the months excluding becomes +0.27% and May after recession average becomes +0.77%

5 of the 8 months of May following the end of a recession (or 4 out of 7 if you exclude May 1954) finished the month with a gain. The average gains for the months of May following a recession are 500% greater than those not following a recession, and over 325% greater than the overall average for May dating back to 1950. To download the spreadsheet used in this analysis click here.

So if May is higher what will the following month of June bring? The data from my analysis shows that June is higher by an average of 0.05%, while a June not following a recession is higher by 0.17%, and a June following a recession is lower by 0.77%.

So far over the 2 days the market has been open this May, the S&P 500 is 2 for 2 and has done extremely well, up 3.9% with financials leading the way. Bank of America (BAC), Wells Fargo (WFC), American Express (AXP), Goldman Sachs (GS), JP Morgan (JPM), Bank of NY Mellon (BK), and even Citigroup (C) have all been up BIG, even with the stress test results to come out in less than 3 days. At this pace we are on track to break the record for May- May of 1990 up 9.2%! If the S&P 500 finishes May higher than the average, could this indicate the gloomy days are behind us? Please share your thoughts.


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