The Only Three Questions That Still Count: Investing By Knowing What Others Don't, 2nd Edition

Sell in May Because the January Effect Will Dampen Your Santa Claus Rally Unless There Is a Witching Effect

Another popular myth—or set of myths—is what I’ll lump together under the category “Sell in May.” Sell in May comes from the old saw, “Sell in May, go away”—which is supposed to mean summers have lackluster returns. These kinds of myths include all the month-of-the-year, day-of-the-week, holiday myths and so on. Santa Claus rallies. The October effect. Monday effect. Friday effect. The summer rally. Triple Witching. The month-end effect. The third-Thursday-during-a-waxing-moon effect. The second-Tuesday-each-month-of-baseball-season effect. Ok, you got me again. I made those last two up, but they don’t sound much sillier than the others.

Investors usually don’t believe all these all at once. They believe some and not others. But they don’t check to verify validity. “Who would believe in a Friday effect? That’s silly,” one investor may say while preparing for the Santa Claus rally. You may instinctually know these are so much hogwash. Yet the media loves reminding us of them and telling us the market did thus-and-such on Friday, so we know this, that and the other should happen on Monday. There are a fair number of published studies—some in scholarly journals that should know better and others described in popular media—showing from time X to Y, if you bought on day A and sold on day C, you would beat the market. Invariably, if you vary the beginning and end dates—or look ...