Since 1967, Yale Hirsch published results of the “Sell in May and Go Away” system in his Stock Trader’s Almanac. Hirsch was not the first to acknowledge the effectiveness of this approach. The Financial Times of London published “Sell in May and Go Away” in May 1935. Researchers show positive out-of-sample results in all 37 countries that they examined. It was documented in 114 stock market indices beginning with the U.K. in 1693. But the effect does not apply just to stocks. Seasonality has been effective in 12 of 13 different asset indices with a time horizon of up to 87 years. Similar to momentum, seasonality is persistent, pervasive, and not always recognised.

There are several reasons why the “Sell in May and Go Away” effect works so well. First are seasonal patterns of production and consumption. During summer vacation months, there is less economic activity, less trading activity, and less liquidity. In winter, there is more consumer demand fueled by the Christmas season. However, there are also less evident forces at work, reduced capital flows, vacations, or earnings, which have put a lid on average equity market gains of only 1.4% during May and October since 1946. This compares to an average of 6.6% during November and April, more than four-fold.

Certainly, there is value in Sell in May relative to a 100% buy & hold allocation to stocks. However, there is a big caveat. Seasonal Sector Switching strategy only holds 2 (3, respectively) out of 11 sectors. While this improves returns, the concentration bears additional risk. Furthermore, the strategy is always fully exposed to equity and, unlike our momentum investing strategy, there is no trend-following mechanism rotating out from risk in adverse market environment.

For those reasons, we don’t recommend the Seasonal Sector Switching strategy as a standalone strategy but always only as an add-on strategy for the equity position as part of a more complete and robust asset allocation strategy.