It's May Again -- Time to Sell?

An old Wall Street saw says you should -- and history seems to support it. However, moving into cash may not be the best choice

By Sam Stovall

"Sell in May, and then walk away." Now that the calendar has flipped forward to the fifth month, it seems appropriate to look again at this Wall Street adage. It reminds investors that historically, stock-price movements have been substantially stronger in the November-April period than in the May-October stretch. The old rhyme admonishes investors to move into cash in May, steering clear of a typically weak period for equities, and back into stocks in November, when share prices typically begin to bounce back.

A survey of price action for the S&P 500-stock index during the past 30 years shows that the old saying may have some merit. While the S&P 500 advanced an average of 7.4% during the November-April period over that span (without dividends reinvested), it posted an average gain of only 1% May-October. And the November-April period outperformed May-October 70% of the time.


  History shows that the S&P 500's worst month is September and that the worst three-month period is the third quarter, since analysts typically reduce their full-year earnings estimates as third-quarter results are about to be released. October is historically a month in which the market establishes a bottom, so the S&P 500 enters November at a fairly low level compared to other months. This gives the November-April period the advantage of starting at a low base.

The November-April stretch also includes two periods of large cash infusions into the market: January, when pension funds typically put a lot of money to work, and April, when many individuals add to their IRAs. November is also around that time of year that analysts begin looking ahead by five quarters, rather than just focusing on the final one or two.

Have sectors experienced a similar skewing of performances? Over the past 13 years (the most available for S&P 500 Global Industry Classification Standard sector data), it appears that they've also seen a pronounced favorable and unfavorable pattern.


  The following table shows price changes (without dividends reinvested) during the two six-month periods for sectors in the S&P 500 from May, 1990, through April, 2003, along with their frequency of outperformance (FO). The FO helps identify those sectors whose average performances may have been skewed by one or two stellar periods. The sectors are sorted by FO in the May-October periods.

As with the overall market, the table shows that most sectors have also seen their best results in the November-April period. On average, none of the groups posted negative results during the November-April interval, while three sectors posted average declines May-October. Only Consumer Staples and Health Care showed superior performances in the May-October period, while Telecom Services had a relatively similar performance in both.

S&P 500 Sector Performances -- May, 1990, to April, 2003
Nov.-Apr. May-Oct.
Sector % Chg. Freq. Outperf. % Chg. Freq. Outperf.
Health Care 6.0 38% 7.6 77%
Consumer Staples 4.9 54% 5.7 77%
Financials 12.6 85% 2.4 62%
Telecom. Services 1.8 23% 1.2 62%
Info. Tech. 12.9 77% 0.9 54%
S&P 500 8.3 NA 0.7 NA
Utilities 2.4 23% 0.3 38%
Energy 6.5 31% 0.1 46%
Industrials 10.6 69% (1.6) 15%
Consumer Discretionary 13.3 69% (2.8) 31%
Materials 11.1 69% (5.2) 23%

A market timer who was long stocks November-April but then moved into cash May-October would have outperformed the broad market only marginally during the entire year on average. But after taxes and commission costs, it would hardly have been worth the effort. The most valuable lesson this study offers, however, is how such an investor could have invested during both periods. Take a look at this bar chart:

Had an investor been in the S&P 500 November-April and then adopted a defensive approach by rotating into either the S&P Health Care or Consumer Staples sectors May-October, he or she would have significantly outperformed a mere buy-and-hold investor.


  The 13-year (May, 1990, through April, 2003) compound annual growth rate for the S&P 500 was 8.4% (without dividends reinvested). Owning the S&P 500 November-April and then rotating into the S&P Consumer Staples sector would have returned 13.5% per year. What's more, a similar rotation approach that substituted Health Care for Consumer Staples would have returned 15.4% on average.

Of course, no one can guarantee that what worked in the past will continue to work in the future. But if investors were to look for companies in the Consumer Staples and Health Care sectors that currently have favorable fundamental outlooks, what would they find? The following table lists three industries from each sector, along with stocks in each industry that carry 5-STARS (strong buy) recommendations from S&P analysts.

Favored Industries 5-STAR Stocks
Biotechnology Amgen (AMGN ), Cephalon (CEPH ), Gilead (GILD ), MedImmune (MEDI )
Health Care Equipment C. R.Bard (BCR ), Boston Scientific (BSX ), Dentsply (XRAY ), Medtronic (MDT ), Varian Medical (VAR )
Household Products Clorox (CLX ), Procter & Gamble (PG )
Personal Products Alberto-Culver (ACV )
Pharmaceuticals Barr Labs (BRL ), Pfizer (PFE ), Teva (TEVA )
Soft Drinks PepsiCo (PEP )

Industry Momentum List Update

For regular readers of the Sector Watch column, here's this week's list of the 11 industries in the S&P Super 1500 with Relative Strength Rankings of "5" (price performances in the past 12 months that were among the top 10% of the 116 industries in the S&P 1500) as of May 2, 2003.

Industry/Sector Company S&P STARS* Rank
Biotechnology/Health Care Amgen (AMGN ) 5 STARS
Computer Storage & Peripherals/Information Technology Storage Technology (STK ) 4 STARS
Consumer Electronics/Consumer Discretionary Harman International (HAR ) Not Ranked
Fertilizers & Agricultural Chemicals/Materials IMC Global (IGL ) 5 STARS
Footwear/Consumer Discretionary Reebok (RBK ) 4 STARS
Internet Software & Services/Information Technology Yahoo! (YHOO ) 1 STAR
Metal & Glass Containers/Materials Pactiv (PTV ) 4 STARS
Office Electronics/Information Technology Xerox (XRX ) 2 STARS
System Software/Information Technology Microsoft (MSFT ) 5 STARS
Trucking/Industrials Yellow (YELL ) 5 STARS
Water Utilities/Utilities Philadelphia Suburban (PSC ) 4 STARS

* S&P's stock appreciation ranking system for the coming 6- to 12-month period: 5 STARS (buy), 4 STARS (accumulate), 3 STARS (hold), 2 STARS (avoid), 1 STAR (sell).

Stovall is chief investment strategist for Standard & Poor's

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