Update on Sector Rotation in the "Sell in May and Go Away" Strategy

A common mantra on Wall Street is to “Sell in May and Go Away.” This strategy follows documented seasonal patterns that point to higher (lower) market returns during the months of November to April (May to October). We examine whether this pattern continues to exist in more recent periods, and we also explore whether such a strategy can be improved by simultaneously rotating into and out of cyclical (or defensive) sectors. Our results suggest that investors can still generate positive alpha by following the traditional “Sell in May” strategy, albeit at a slightly reduced level in more recent years. We also find that a sector rotation strategy that moves into cyclical (noncyclical) sectors during the November to April (May to October) period can provide significant incremental alpha, but primarily when implemented in concert with a counterbalanced short selling strategy.