With the Stock Market, Always Bear in Mind the Season

A Shorn Bear

"Sell in May and go away." That's not just a hoary old market saying, it is an actual strategy that a surprising number of people believe and follow and repeat endlessly. The belief underlying this saying is that the market tends to make most of its gains in the winter months between November and May. The reasoning continues that the stock market tends to give up these gains when it corrects during the summer months of May, June, July and August. People have better things to do than sit inside talking to their broker when when the weather is nice, the kids are home from school and the beach is calling. That, in any event, is the thinking. People usually point to difficult summer market periods in the recent past ("anecdotal evidence") to back up this theory's validity. Any veteran of 2010, 2011 and 2012 will recall wild market fluctuations during the summer relative to the rest of the year.

It also is a truism that October is a terrible month for the stock market, which is why the other part of the "Sell in May" theory is that you buy back into the market at the beginning of November. Many market "crashes" have occurred in October, most notably in 1929 and 1987, and they have received a lot of press over the years.

You also used to hear more about a typical "summer rally," but that has gone a bit out of fashion because it doesn't rhyme. Other market truisms include the "Santa Rally" into year-end, and the "June Swoon." The "Presidential Election Cycle" is still followed by some and does appear to have some statistical validity, with various cynical supporting theories that comport with "common sense."

The truth, as indicated by the below charts and graphs, is that the market goes up, and down, and up, and down, whether it be winter, spring, summer or fall. All of these truisms and theories have some small basis in fact, a "kernel of truth" that maintains their popularity, but the market, overall, does not respect them. What we look at below are the odds, the percentages, the vigorish, the .... well, we're talking about the actual likelihood of bad things happening in the summer and October and good times during the winter and rest of the year.

I collected a number of charts from various sources, covering different time frames and different markets. Some are simple, some are fancy, take your pick. As you will see, returns vary widely, but there are some recognizable patterns. As a generality, February and June-September tend to return less than in other months. October can be good or not-so-good depending on what time frame is involved. Pre-election years are best for returns, followed in sequence by the others in the Presidential cycle. Please note that you really have to look closely at what each chart is portraying because they have different time periods and are measuring different things.

One important factor is that some months have their performance wrenched in one direction or another by a few "outlier" events. October is the best example of this volatility phenomenon. It seems to have the most memorable market crashes (e.g., 1929, 1987). Even with those cataclysmic events, though, October's performance is not all that bad, and if you throw those outlier events out (I know, that's distorting things), October is just an average, even a fairly good, month to be invested. May is similar - if you throw out the occasional poor May, performance is about the same as other months. But when the market crashes and you are invested, you can't just throw out that month, it's part of the whole deal of trading and investing. Those poor Mays and Octobers often occur after long periods of great rallies, leading to complacency and the belief that "it can't end this month." But it does. And the publicity these poor performance months have received through the years makes them the locus of negative sentiment - people notice it is October, start talking about poor Octobers of the past, see a little market weakness, and rush to the exits. October, statistically, is the most volatile market month. This may be part of why so many people consider October to be "weak' despite it not being all that bad overall.

October has the most price variation, on average

The impact of the poor press that the occasional market crashes have given October can be seen in the fact that September never gets a bad rap and isn't part of any market rhymes. According to all the data, though, September is by far on average the worst month for the market. The 1929 market peaked in the first week of September and fell thereafter, but nobody remembers that, because the declines were incremental. They do, however, remember Black Tuesday and all that because those quick declines were dramatic. Why September? That's debatable, but my pet theory is that parents have to pay their kids' tuition then, requiring withdrawals from the market. It really doesn't matter why - it just is a fact that, statistically, September is the month that has performed worst.

Will the summers be bad to the market in 2013? Nobody can say. Summers tend to be a bit more volatile than winter months, which perhaps accounts for part of their poor reputation. During the summer, the pickings usually appear to be a little tougher.