Sell in May and go away by midf research

by **Cals** Sun 15 May 2016, 18:33

Saturday, 14 May 2016

Sell in May and go away

by midf research

THIS month, the financial adage “Sell in May and go away’ has been grabbing headlines again. Discussions surrounding this seasonal anomaly in the stock market don’t seem to be out of fashion even though some of the selling pressure in May may be event-specific.

Take the recent correction of the FBM KLCI as an example.
There are a few events that might have prompted investors to sell Malaysian shares towards April. Foreign fund inflow was strong in March and there had been some correction in recent weeks.
On top of that, there were also some developments in the domestic capital market that dampened investors’ sentiments. That partially contributed to the weakening of the ringgit and may have prompted foreigners to take profit from across various asset classes.

Coupled with that were China’s weaker economic data and the heightened anticipation of the US Federal Reserve raising interest rates.
Then, why do some people attribute the selling to this famous saying? According to one explanation, fund managers in the West normally square their positions sometime in May before they go off for summer holiday.
As enough of them do the same, share prices go down and trading activities decline during the summer period. Hence, the returns during this period might not be as lucrative.
For those who believe in this phenomenon, they adopt the “Halloween strategy” in hopes to get better returns.
The calendar year is divided into two halves, summer and winter. Essentially, the “summer” period runs from May to October (Oct 31 being Halloween Day) while “winter” starts from November to the following April. Some concluded that the returns of the “winter investments” generally fare better than the “summer investments”.
Based on the average performances of several benchmark indices from 2005 to 2015, the winter periods have outperformed the summer periods, with the exception of Hong Kong’s Hang Seng Index (see chart).

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But as we dive deeper, this average of total performances might appear too simplistic.
On a yearly basis from 2005 to 2015, the KLCI has actually performed better 6 out of 11 years during the so-called “summer period”. That’s 55% in occurrence through this period. The probability is also about 50:50 for both periods in the neighbouring bourses, namely the Singapore Stock Exchange and Stock Exchange of Thailand. They do better from May till October in 5 out of 11 times from 2005 to 2015.
Halloween effect
Interestingly, the observation of a possible “Halloween effect” is more apparent as we move to countries with four seasons. Hong Kong’s Hang Seng Index saw worse performance during “summer” 64% of the time or 7 out of 11 years. It is even more obvious for the US market as the Dow Jones Industrial Average did worse from May to October 73% of the time or 8 out of 11 years.
This sampling has one flaw though, as the difference taken from this six-month period does not take into consideration the fluctuation in between. So the keyword here is the horizon.
When we look at stock performances, what is the timeframe to look into? The outcome will be different if we view it from a monthly basis, yearly basis and even a multiple-year average.
It is also pertinent to note that the trend is seen in the general gauges, but the performances of one sector can differ from another. In a popular paper that studies the US sectors, the Halloween effect is almost absent in industries related to retail consumption. On the other hand, it is very pronounced in production sectors.
Generally speaking, the Halloween effect is less apparent in stocks with lower beta compared to those with higher beta. Compared to the FBM KLCI, the FBM Small Cap Index saw a greater “Halloween impact” as the gap in returns for the “summer” and “winter” periods are even wider.
Not every investor buys into this adage though. Ask a contrarian investor who probably doesn’t follow the herd. He or she may reckon it’s time to bottom-fish for value stocks should there be a selldown.
Trading may be choppy in May during some years but that also present opportunities to make more money from shorter trades.
When the market is volatile, some investors will look for stocks with relatively steadier returns like dividend stocks, consumer stocks or real estate investment trusts.
Others may continue to buy based on a bottom-up approach. Long-term investors who see value beyond a six-month period may also be unperturbed by this saying as long as they hold on to the right stocks.