If you’ve been trading as long as I have, then you’ve heard all the market myths and anecdotes. There are holiday-related myths, like the “Santa Claus Rally,” and there are calendar-related myths like, “As January goes, so goes the year.” The one myth that really freaks people out is, “Sell in May, then go away”, because there is historical data to support it.
Sell in May and go away?
When the markets enjoy a very strong start to the year – like this year – traders begin to get nervous around now. That’s where the “sell in May” myth comes from. “Things will only go downhill now,” they think, “and the markets won’t improve til we get through August, September and October.”
Yes, those three months are typically the worst for the markets. But instead of letting the technicals guide them, these traders panic and sideline their portfolios.
If you actually did this over the last few years, your portfolio would have gotten hammered. You would have missed out on tremendous gains, and you would have ended up buying back stocks at higher prices in the fall.
So, it might have data to back it up, but “sell in May” is about as reliable as the Super Bowl indicator. Since 2000, it has correctly predicted market direction 12 times, which means it’s been wrong seven. I need much better odds than that.
When indicators, trends and market momentum are strong, why fight it? If you want to take some gains off the table, then by all means – do that. We are here to take profits when we have them.
But unless the technicals are turning south, don’t fold. Watch the market action before making any drastic moves. Turn off the noise so you can focus. You don’t want to suddenly find yourself fighting an expensive, uphill battle when you return.