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The Truth Behind May’s Flat Market

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It is really hard to predict the markets. It is even harder when it comes to the month of May which many are hanging on the cliché of “sell in May and go away.” This kind of attitude is long in the culture of many investors as part of the Wall Street. But, where does this mindset really come from?

As history is telling us, this practices can be traced back to old England, when the stock brokers would go on summer vacation in May and not return until September. In fact, a complete cliché as mentioned above is that “Sell in May and go away, do not return until St. Leger’s Day.” Upon leger’s day, the final horse race of the season will occur. Thus, stock brokers did not bother getting back to work until this season has ended. While the stock brokers are away, it caused those days as flat over the summer months.

On a clearer side, Sell in May and go away is a well-known trading adage that warns investors to sell their stock holdings in May to avoid a seasonal decline in equity markets. The “sell in May and go away” strategy is that an investor who sells his or her stock holdings in May and gets back into the equity market in November – thereby avoiding the typically volatile May-October period – would be much better off than an investor who stays in equities throughout the year. This strategy is also based on the historical underperformance of stocks in the six-month period commencing in May and ending in October, compared to the six-month period from November to April. According to the Stock Trader’s Almanac, since 1950, the Dow Jones Industrial Average has had an average return of only 0.3% during the May-October period, compared with an average gain of 7.5% during the November-April period.

This can be proven in today’s times according to the date of Dow Jones Industrial Average. The average gain of November through April is 7.5% while on May through October period only have a gain of 0.3%.

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