May is likely one of the noticeable and most anticipated months in securities exchange. It creates panic especially to newbie investors. Why? Because this is when many investors do their profit taking resulting to a significant and somehow continuous fall of the stock prices in the succeeding months. In other words, it is deemed to be the start of the bearish cycle of the year. The "sell in May and go away" trading adage has been in existence for many years and has been followed by many traders throughout the world, in spite of the fact that this predominantly came into origination in view of the historical performance of the US stocks.
Why Do Traders Sell in May and Go Away?
Every year, the stock market often undergoes the cycle of ups and downs. For many years, it has been observed that during the period May-October the market is highly volatile with a downtrend bias. Therefore, many investors sell most if not all of their shareholdings with the purpose of avoiding the volatility during this six-month period.
It is claimed to be more prudent and profitable to practice this strategy rather than staying in the market and be exposed to the high risk of losing all the gains accrued in the previous months. So during this period, they go cash. They then re-enter the market during the last two months of the year (commonly in November) when a bullish trend starts to re-appear which lasts until January or February of the following year.
The Reason Behind Sell in May and Go Away Strategy
Before we answer this question, it's ideal to first comprehend the rationale why there is a notable underperformance of the stock market between May and October. What's something extraordinary with these months? If you live or have lived in a Western nation, you would effortlessly realize that it's the summer season. When I was still in living in Europe, I saw how energized individuals are about summer. They go insane as though they haven't seen the sun for a long time. Can't blame them, they just feel this warm temperature for a couple of months in a year.
So what do they do in summer? They take long vacations, they travel abroad, they go shopping spree, they turn out to be more dynamic in games and recreation, they do a great deal of things. In short they spend a lot of money. The expenses increase, the savings are reduced. Thus, the budget left for investment is also cut. How does this influence the money markets? It's straightforward, lesser buyer implies lower demand; lower demand pulls the stock prices down.
Is "Sell in May and Go Away" Applicable in the Philippines?
But wait! Does it really influence the Philippine Stock Market? Summer in the western countries are just ordinary months in the Philippines. This could lead you to thinking that the "sell in May and go away" strategy is not really that effective in the Philippine market. While this is somehow logical, we have to remember that our country is still developing and our economy relies heavily on foreign investors. In addition, it's a well-known fact that only a tiny portion of our entire population are investing in the stock market. So it's not surprising that foreign investors still control the movement of the market. Simply put, yes we are still affected indirectly.
Let's have a look at some historical data to prove our theory. The figures below demonstrate the daily chart of PSEi for the years 2013, 2014 and 2015. As you can see, both 2013 and 2015 were in downtrend after May. If you have sold your shares before this period, you have spared yourself from losing cash. Notwithstanding, it is not the case for 2014. PSEi was extremely bullish. If you have sold your positions, you have missed a good opportunity to earn more.
Why I Did Not Sell in May and Go Away
I have to admit I didn’t bother to follow the “sell in May and go away” strategy this year. The reason is basic, it’s election month! More often than not, the market generally rallies right after the election day. I had the same sentiment for this year especially that Duterte won the administration. Besides the market has suffered a major decline last year. I have the feeling it’s about time for a recovery and return to 8000 level or beyond.
As illustrated above, you should take the “sell in May and go away” advice with a grain of salt. It’s not an ultimate rule. Sometimes it happens sometimes not. As I always say, nobody can genuinely predict the behaviour of the market. However you can always make an intelligent guess on which course it is heading (bullish or bearish) based on the economic trend of the country.