‘Tis the season for market seasonals

Although much commonly received wisdom—especially the type that rhymes—deserves to be treated with a healthy dose of skepticism, “Sell in May and go away” has a firm basis in reality, even if it’s probably not an optimal timing strategy. But it’s true: Historically, the US stock market has racked up the vast majority of its gains during certain months of the year—something that has implications for both traders and investors.

First, some numbers. From 1960 through 2017, the S&P 500’s (SPX) average October-April return (excluding dividends) was 8.08%, while the May-September period returned a paltry 0.17%. And considering the many sell-offs that have occurred during the summer and early fall months (September, not October has been the market’s worst month, by the way), a trader could certainly decide that extra 0.17% is not worth the volatility headache. The following chart sums up why some investors would just as soon go away in May:

S&P 500 (SPX) average monthly returns, 1960-2017

Source: OptionsHouse

The rub, as always, is whether “this year” will follow the general historical pattern. For example, traders who got long in October 2009 and sold in April 2010 enjoyed a 12.3% S&P gain, but that was after missing out on a 21% gain in May-September 2009. In fact, these traders would have missed out on positive May-September returns in five of the past six years.

And consider May itself. Since 1960, the SPX has posted a gain in May in 34 out of 58 years—a 59% winning percentage that puts it ahead of February (53%), June (54%), July (48%), and September (43%), and not too far behind January and March (61%). The catch is that the average down May lost 3.3%, while the average up May gained only 2.6%.

S&P 500 (SPX) monthly winning percentages, 1960-2017

Source: OptionsHouse

For argument’s sake, let’s look at the returns if you instead chose to extend your time in the market by one month and “Go away in June and sing a happy tune”:

●Average October-June return: +8.31%

●Average July-September return: +1.94%

A little better, but worth it? Now, if you want some real seasonal food for thought, here’s the average SPX return since 1960 if you simply cut September out of the picture: +8.94%.

The muted returns of the May (or June)-September period are real, but what may be a dead period for long-term investors can be a boon for traders, who can potentially take advantage of the period’s typical characteristics by trading shorter-term market swings, using more short-side setups, and incorporating volatility plays.

Traders, though, always need to remember that what’s happening now is more important than any seasonal tendency.


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