Is "sell in May and go away" a reliable investment strategy?

Understanding the "sell in May" strategy

​The old stock market adage "sell in May and go away" suggests investors should exit equity positions in May and re-enter the market in November. This strategy is based on the historical observation that markets often underperform during the summer months compared to the winter period (in the northern hemisphere). 

​With major indices such as the S&P 500, FTSE 100, and Stoxx 50 having already significantly come off their early 2025 record highs, some US indices dropping close to 20% - to bear market territory -, this seasonal strategy is once again receiving attention.

​April so far delivered another negative month for major stock indices, primarily due to the announcement of sweeping tariffs by the US administration on all its trading partners. This follows one (for European indices) or two (for US indices) negative months which isn’t exactly bullish.

​The question now facing investors is whether markets will deteriorate further during the historically weaker period between May and October. Historical data shows that many significant market corrections have indeed occurred during these months.

​However, recent evidence suggests this pattern may be changing. According to research from LPL Research using Bloomberg data, investors who sold indices at the beginning of May and bought back at the end of October would have missed significant profits over the past decade, despite this strategy working well in 2022.

​​Academic research on the “Sell in May” adage

​The most comprehensive peer-reviewed study on the "Sell in May and go away" phenomenon remains the seminal paper by Bouman and Jacobsen (2002), titled The Halloween Indicator, 'Sell in May and Go Away': Another Puzzle, published in the American Economic Review.

​This study analysed stock returns across 37 countries and found that, on average, returns from November to April were significantly higher than those from May to October, with the effect being particularly strong in European markets. Notably, the study documented the presence of this seasonal pattern in the UK as far back as 1694.

​While this research is over two decades old, it continues to be a foundational reference in discussions about seasonal stock market patterns.

​More recent analyses, such as a 2023 study by Manulife Investment Management, have examined the strategy's effectiveness in modern markets. This study compared the returns of a hypothetical investor employing the "Sell in May and go away" strategy with those of a buy-and-hold investor over a 50-year period.

​The findings indicated that the buy-and-hold strategy generally outperformed the seasonal approach, suggesting that while the seasonal pattern exists, it may not be advantageous for investors to attempt to time the market based on this adage.

​Liquidity concerns in the current market

​Fundamental investors may have additional concerns about market liquidity following the US induced tariff trade war with its global trading partners and ensuing US bond market crisis. They may remember that only a couple of years ago three US banks – Silicon Valley Bank, Signature Bank, and First Republic Bank – failed in less than two months, with the latter representing the second-biggest bank failure in US history.

​The possibility of reduced banking liquidity amid heightened market uncertainty, adversely affected investor sentiment, increased risks of a global recession and possibly negatively affected US earnings - especially in regards to forward guidance - may have further negative implications for equity markets, potentially lending support to the "sell in May" approach.

​For those considering their approach to these market conditions, understanding different trading strategies is essential. Trading for beginners resources can provide valuable context for navigating these complex conditions.

​Is "sell in May" right for today's market?

​When evaluating whether to follow the "sell in May" strategy in 2025, investors must consider both historical patterns and current market conditions. While the adage has shown merit over long historical periods, its effectiveness has diminished in recent years with some notable exceptions in bear markets, however.

​The current market displays several concerning characteristics – worsening investor sentiment, recent bond market stress, a slowing US labour market and potential recessionary signals.

​However, potential strong earnings from major technology companies, a possibly quick resolution to the US-led trade war and increased pace of global rate cuts, provide counterbalancing positive factors.

​Technical indicators suggest equity markets are at critical junctures, with major indices testing important support levels only last week. The price action over the coming weeks, particularly whether support levels hold during potential further stock market declines, will provide important clues about market direction for the remainder of the year.

​S&P 500 Post-Election Year Seasonal Pattern 1949-2024 vs. 2025 

Rather than blindly following the seasonal strategy, investors might consider a more nuanced approach based on their investment goals, risk tolerance, and time horizon. This might include selective profit-taking in overextended positions while maintaining core holdings in quality companies with strong fundamentals.

For those who prefer not to make active trading decisions, maintaining a share investing portfolio with a long-term focus might be preferable to attempting to time seasonal market patterns.

How to approach seasonal market patterns

1. Do your research on the validity of seasonal patterns like "sell in May" and consider whether they align with your investment strategy and current market conditions.
2. Choose whether you want to trade or invest based on your timeframe and risk tolerance.
3. Open an account with us if you don't already have one.
4. Search for the specific indices or stocks you're interested in trading within our platform or app.
5. Place your trade, ensuring you have appropriate risk management strategies in place, particularly if you're making decisions based on seasonal patterns that may not hold in all market environments.

Remember that market timing strategies like "sell in May" are generalisations based on historical patterns that don't necessarily repeat each year. 

Developing a comprehensive investment approach that considers fundamental analysis, technical indicators, and broader economic conditions will typically yield better results than relying solely on calendar-based rules.

For those new to seasonal trading strategies, using a demo account to test different approaches without risking capital can be a valuable learning experience. This allows you to evaluate whether strategies like "sell in May" would have worked in recent market conditions before applying them to your actual portfolio.