Stay Awhile
Tuesday, May 1, 2007 at 05:00AM
Bespoke in Market Analysis

If you have watched, read, or listened to any market commentary over the last twenty four hours, you undoubtedly have encountered a story discussing the Wall Street adage, Sell in May and Go Away.  After the January Effect and Santa Claus Rally, this is probably one of the most widely discussed market axioms.  As the chart below shows, the market, on average, is certainly weaker beginning in May and through the summer.

But just because it is weaker does not necessarily mean it tends to go down.  The table below the chart shows the percentage of time the market rises from May 1 through September 1 over various time frames. Over each time frame covered, the market has a positive return at least 60% of the time.

As far as the likelihood of a significant gain is concerned, history tells us that the Dow is twice more likely to have a 5% gain over the next four months than it is to have a 5% decline.  Since 1929, there have been 30 years where the Dow went up more than 5% between May 1st and September 1st, while there have only been 14 years where the index declined by more than 5%.  There have been 14 years where the index went up more than 10% versus only 8 occurrences of double digit declines.

So while the Dow typically does not knock the cover off the ball over the next five months, it is not necessarily the time to go away.

Dow_jones_average_performance_may_1

Article originally appeared on Bespoke Investment Group (http://bespokeinvest.com/).
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