Sell In June Avoid A Swoon?

"Sell in May and go away!" is an old Wall Street Maxim which basically means that stocks as a whole don't do much in the summer months. When I started in the business this was translated as "Out on Memorial Day, buy em back after Labor Day". We do know that statistically summer is often a weak period for stocks. We covered this in a post back in April {see: http://lumencapital.blogspot.com/2009/04/sell-in-may.html }.

I wanted to put a bit of meat on the bone so to speak so I ran some numbers over the weekend asking my systems to show results when looking for a seasonal market high between May 20 & July 31 and a subsequent seasonal market low between September 1 and November 1. We reviewed the period from 1990 until present or 19 years and used the S&P 500. We used the absolute high and the absolute low for each period in question and looked at weekly data for the S&P 500. We did not include dividends.
Results:
~Market declined in 17 of 19 years or almost 90% of the time.
~Stocks advanced in 1995 {1.03%} and in 2006 {2.50%}.
~The average loss = -7.97%
~The best year was 2006 with that 2.50% gain
~The worst year was 2008 with a -41.69% loss.
~Mean loss was -6.61%
~Period when stocks made made the majority of this period's seasonal highs: May 21-May 31. {6 years}
~Average date when seasonal peak in pricing took place: June 21-July 7
~Period when stocks made the majority of this period's seasonal lows: October 4-17 {12 years}
~Average date when seasonal low in pricing took place: September 28-October 17

Treating studies like this as dogma can be dangerous because there really is no predictive power in them. Nothing can stop this year from being the exception to the rule and posting a huge rally in the summer. Stocks did rally for much of the summer in 2006 before seeing a slight Autumn decline. Stocks have gone on to post great 4th quarter and yearly results in many of these years. Also people asking my question in a slightly different way may come up with slightly different results. But to me it is pretty decent evidence that we need to develop a more cautious stance in regards to the Playbook as we plan for the summer/early fall months. A river boat captain who knows that around a certain bend there is usually a sand bar prepares for that event long before he gets to that point. If this is the one year the river has shifted, then he is pleasantly surprised. If it's there as usual then he is ready to handle it as it will offer few surprises. It really is no different with the market. Historical patterns tend to have some reasoning behind them and it is best to respect what has happened in the past.

*Long ETFs related to the S&P 500.