"Sell in May, Go Away" Turned Out to Be Good Advice

One of Wall Street’s old adages — sell in May and go away – turned out to be good advice for stock investors.

On the heels of April’s 4% surge, the Dow Jones Industrial Average sank 1.88% in May. The Dow industrials ended the last day of the month up 128.06 at 12569.64. It was the second-consecutive year stocks have ended lower in the month, though this month’s loss was nowhere near as bad as the 7.9% drop of May 2010.

One of the biggest proponents of the sell-in-May theory is Jeff Hirsch, editor of Stock Trader's Almanac. He analyzed data from 1950 through 2009, and found that the Dow industrials increased an average of 13.3% over the years for the periods between November and April. The average was less than 1% for the periods between May and October.

History aside, investors recently have had a lot to fret over heading into the sleepy summer months. The threat of debt defaults across Europe, gasoline prices above $4 a gallon in many parts of the country, and nervousness over what will happen when the Federal Reserve stops pumping cash into the economy in June have spurred investors to seek out more conservative investments, such U.S. Treasurys and the dollar. The trend is expected to continue. Treasury yields (which move in the opposite direction of prices) are expected to rise after the Fed concludes its QE2 bond-buying program on June 30.

Does that mean now’s the time to unload stocks? Not so fast. “Sell in May” didn’t work out in 2007 and 2008, when the trend reversed and the Dow industrials did better in the summer months. And while Hirsch’s research is compelling, the Dow industrials represent just 30 companies, so it’s not an accurate indicator of the health of the overall market.

In an interview with Reuters, Hirsch himself suggested that it would be more prudent to rotate into more defensive sectors of the stock market. “It’s a good time to take some profits, tighten up stop-loss orders, hold up on taking major new positions in stocks, and look for better prices in the weaker summer months,” Hirsch told Reuters. “We might not get as much of a pullback as in other years, but things are a little precarious.” He added that investors with “favorites” can sell now with an eye toward buying them back later in the summer when prices decline.