Investment Club: Trying to apply an adage about selling can send you nuts in May

Published on Friday 25 June 2010 19:24

THE "sell in May and go away" stock market cliche seems to have been prescient advice initially, with the FTSE 100 index down 4.1 per cent last month.

But is the tendency for financial markets to ease in May real or imagined? Can the Investment Club capitalise on this adage, or will it miss a trick by putting it down as unsubstantiated folklore?

If we look at the FTSE from 2007 to 2010 we can get a good idea. While we are just looking at the past four consecutive years and treating them as a random choice, it also reflects the moods of the FTSE 100 quite well. This is because we find that 2007 was relatively flat overall, while 2008 markets experienced a fall, in 2009 the markets went up and 2010 is still very much unknown. As the club has accumulated some capital since December, it is looking for a profit-making investment opportunity. To do this we will take the FTSE 100's value on 1 May each year when we sell. Next, try to establish a mechanical buying point between then and the following May when we are to sell our stocks again.

Using this format we find, for example, that if we had sold the FTSE on 1 May, 2007, and bought back in at a low (down 15.6 per cent) between May 2007 and May 2008, then sold out again on 1 May, 2008, then we would be showing a profit of 11 per cent. Following the same strategy for the years 2008-9 (down 42.3 per cent) and 2009-10 (down 2.7 per cent) we come up with profits of 20.8 per cent and 31 per cent respectively, giving an average annual profit of 20.9 per cent over three years. But we are not home and dry yet. We still have to formulate a routine for buying back in.

For example, if we take the average fall in the sample period of 20 per cent and use this as a mechanical buying-in point, how well does the club fare? Not very, because this is effectively a bear-market scenario. Let us be more realistic and take a fall of 15 per cent from May's selling value before reinvesting and see where that gets us. I am afraid the answer is the same as being unrealistic: we are burdened with losses.

Even if you just look at the FTSE values at the beginning of May and the and end of May, in the sample period years, 2007 and 2009 go up while 2008 and 2010 go down.

So there is not sufficient consistency in price behaviour to allow for profitable trading.

Unfortunately, on this analysis the snappy May maxim is just that. Therefore we are back with our paper and pencil analysis, which served us well last month with a rise in the club's unit price to 2.68, a whisker off an all-time high. So sell in May and go away if you like, but the club is not for moving this month.