The Betfair Prof: "Sell in May, Go Away, Buy Again on St. Leger Day". Or not?

The Betfair Prof / Leighton Vaughan Williams / 29 September 2009 / Leave a Comment

"October", wrote Mark Twain, "This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February."

And he is, of course, right. Speculation in stocks is always risky. But are there some times of the year when it more advisable to buy or sell than other times? Some people think so and the classic saying, "Sell in May, go away, buy again on St. Leger Day" is one of the more famous aphorisms encapsulating this advice.

For those totally unacquainted with affairs of the turf, 'St. Leger Day' is the day on which the final, oldest and longest classic race of the annual calendar (the St. Leger Stakes) is run, traditionally the second Saturday in September. A variant of this adage is the 'Halloween indicator', which holds the same advice with regard to selling in May, but advocates holding on for a few weeks after St. Leger Day, till about October 31st, before buying again.

The assumption underlying both strategies is that stocks tend to underperform during the summer months. But is this true? Ben Jacobsen and Sven Bouman, writing in the prestigious American Economic Review, in 2002, certainly believe so - "... we find this inherited wisdom to be true in 36 of the 37 developed and emerging markets studied in our sample.

The 'Sell in May' effect tends to be particularly strong in European countries and robust over time. Sample evidence, for instance, shows that in the UK the effect has been noticeable since 1694". Note that - since 1694! That was the year that the Bank of England was formed. Also the year (incidentally) that the great French philosopher, writer and dramatist Voltaire was born. So what about it? Is early autumn a good buy to buy? Well, it all depends on what you take to be strong evidence, and the academic jury really is out on this one.

This doesn't stop the financial press trotting out the famous dictum whenever events seem to support it. Take May 2006, for example, when the US S&P index declined by 3 per cent and the Japanese Nikkei 225 by nearly 9 per cent. Forbes magazine duly declared on June 6th that the "axiom 'sell in May and go away' worked like a charm". The Financial Times noted on July 14th that "this year [2006] 'sell in May and go away' would have been a great strategy". The Economist on May 25th went further, arguing that the 'sell in May' adage was "an explanation of why investors the world over have been selling shares since May 11th".

So what would have happened if you had sold your shares on May 1st, 2009? On that date the FTSE closed at 4,243. By St. Leger week the FTSE had broken the 5,000 barrier and has edged up further since, to stand at over 5,100 at the time of writing (September 29th). So much for what you should, or should not have done in May!

Is October still a good time to buy? Well, I think Mark Twain had it right all along.