Sell in May and Go Away?

Sometime in April I decided that the market chatter had reached the point where it could be assumed that the market had made as many gains as were likely for a while. There were certainly many other hints as well: the presumptive end of QE2, [over]valuations of tech companies, the coming debt-limit showdown, and all sorts of international instability. I decided the time was right to make a move out of equities (I usually support a long-term buy-and-hold strategy with occasionaly reallocations).

Around the same time people were repeating the old saw of technical finance: "Sell in May and Go Away." As a short-term recap, I looked at normalized prices to see the returns for anyone who followed this strategy. So far, it seems to have paid off. This conservative approach seems to echo the feeling of the country as a whole. This is a mood that the country is going to have to be shrug off if the many wilting economic indicators, such as jobs, house prices, and consumption are going to perk up. But that becomes more difficult to do when playing it safe seems to be the profitable strategy.

I repeat this chart below with data since December, 2010 to show how this cycle played out in the first part of 2011 (and to show that I'm not cherry-picking data.) All of the funds are still up for the year but it does seem like our cycle of big gains is temporarily over. The economy seems likely to stay in a holding pattern or sideways market for a while longer yet. This year's data is shown in the chart below with prices normalized to 1 for each fund on April 29th, 2011.

Finally I'll just mention that, at least this year, following an old market saying seems to have paid off and hedge by adding that market timing doesn't work, except when it does.