The old adage that one should “sell in May and walk away” has been around for years.  I mentioned that bromide about this time last year, urging readers to head for the sidelines if they had not already done so.  I was also suggesting a strategic retreat in August of 2006 (after which the markets went up 20% before plummeting).  In this article, we will look at the actual data and offer up a fresh viewpoint.  Then, turn our eyes to the recent GDP numbers, which were awful, though many took comfort in the apparent rise in consumer spending.  Are Americans back to their old ways?  It will make for an interesting discussion.

My friend and South African business partner, Prieur du Plessis, recently updated a chart on monthly stock market returns since 1950.  It clearly shows that the November through April period has on average been superior to the May through October half of the year.  (To read his very interesting blog, you can go to http://www.investmentpostcards.com/)

And the difference is quite significant.  As Prieur notes, the “good” six-month period shows an average return of 7.9%, while the “bad” six-month period only shows a return of 2.5%.  Of course, selling creates taxable events, which can hurt your returns.  Plus, you never know when the markets are going to go down and when they will be up.  There can be a lot of variance from year to year.  For instance in 2007, the markets were up during the summer by 4.52% and down during the “good” period by -9.62%, which is opposite the typical pattern.  Of course, the markets did go down by 30% after May 1 last year and down another 5% since then.  That is what bears markets can do.

Which caused me to wonder.  The last 59 years have seen two significant secular bull markets (roughly 1950-1966 and 1982-1999) and two secular bear markets (1966-1982 and 2000-??? – the one we are in now).  I wondered if the pattern changed during the bear cycles, so I shot a late-night note off to Prieur and came in the next morning and had my answer.

It made a significant difference.  May through October in secular bear cycles has been ugly.  Look at this graph:

This is an excerpt from May 2009 issue of Trader's Journal.