Proving Grounds: “Don’t Miss the Best Days” Fallacy
By: Christopher Mistal
September 15, 2015
It never ceases to amaze (amuse?) me, the great lengths that some people will go to discredit, diminish and/or down play “Sell in May.” In years when the market posts a gain between May and November, no matter how meager, it is rather easy. A simple, “see, I told you so,” but then in years like this year when it obviously did work out the skeptics will shout “it was a fluke, buy & hold still outperforms over the long-term.” At which point, they will dig up a chart of the S&P 500 or DJIA or similar going back to 1926 or 1900 or even back many centuries before this. And, yes, buy & hold has outperformed “Sell in May” since 1926 or 1900. If you bought then and have been holding since, I commend you on your investing prowess and longevity.
The only issue with starting way back then is the world is a much different place now than 100-plus years ago. Prior to about 1950, farming was a major portion of the U.S. economy and from 1901-1950, August was the best performing month of the year, up 36 times in 49 years (market closed in August 1914 due to World War I) with an average gain of 2.3%. July was the second best month, up 31 of 50 with an average gain of 1.5%. June was fourth best, averaging 0.9%. Why, you may ask. In a single word, harvesting. As crops were brought to market and sold cash began to move and so did the stock market. 
Agriculture’s share of GDP began to shrink post World War II as industrialization created a growing middle class that moved to the suburbs where hard-earned salaries would be spent filling new homes with all the modern conveniences we all take for granted now. Farming became more efficient and fewer and fewer people worked on the farm. Suddenly, summer was less about the hard work of harvesting crops and more about vacations and relaxing. As the economy evolved and peoples’ lives changed, the market evolved. June and August went from being top performing months to bottom performing months. August went from #1 to #10 in 1950-2014 with an average loss of 0.1%. June went from #4 to #11 (–0.3% average loss). The shift in DJIA’s seasonal pattern is clear in the following chart. “Sell in May” is a post WWII pattern, prior to then it would have been “Buy in May”. 
[DJIA 1-Year Seasonal Pattern Chart]
Don’t Miss the Best Days Fallacy
How many times have you seen a chart like the next one? This is (at least I have been told) a primary reason why you should never sell. If you sell, you will miss the best days and your returns will suffer dramatically. A $100,000 investment (excluding dividends, fees and taxes) beginning on December 31, 1993 would have grown to $439,335 on December 31, 2014 for a gain of $339,335. Missing just the Top 30 Best performing S&P 500 days results in a loss of $9,539. Clearly, the Best Days are important.
[Missed Best Days Chart]
However, look at what happens when we shift focus to missing the Worst S&P 500 days. Missing the 50 Worst S&P 500 days between 1994 and 2014 results in a staggering $5,156,155 gain from the same hypothetical $100,000 investment.
[Missed Worst Days Chart]
Missing just the 50 Worst Days would be a feat of epic market timing especially since many of the Worst Days are also followed immediately by many of the Best Days. This is the very definition of market volatility. Down 4% on Monday only to snap back 4% on Tuesday. Even though the effect of missing the 50 Worst Days is substantially greater than missing the 50 Best Days here is what happens when both the 50 Worst & 50 Best are missed. This still outperforms buy and hold between 1994 and 2014.
[Missed Best & Worst Chart]
How Our Seasonal Switching Strategy Beats the Market
Based upon the three bar charts above we should not be so concerned about missing the Best Days, it is actually the Worst Days that destroy returns. Our Seasonal Best Months Switching Strategy, often referred to as “Sell in May,” outperforms the broader market because it avoids a majority of the Worst Days while capturing the majority of the Best Days. Using the dates for our annual buy and sell signals, located here, from 1994 to 2014 for S&P 500, our strategy has missed 26 of the Worst S&P 500 days while capturing 30 of the Best S&P 500 days. This combination is the reason why our strategy has outperformed. 
Our Seasonal Switching Strategy is based upon Yale Hirsch’s discovery of the “Best Six Months,” November through April, shared in the 1986 Stock Trader’s Almanac. November through April did not become the “Best Six Months” until after 1950 for the reasons above. We do not claim the strategy worked before 1950 nor do we claim it will always work in the future however, as long as people continue to use the summer as vacation time and school resumes sometime in late August, early September, we expect it will continue to outperform the market over the longer haul. 
It is fine to miss the Best Days especially if you miss the Worst Days too. On or after October 1 we will be waiting for our Best Six Months Seasonal MACD Buy Signal to trigger and will email you as soon as it does.
Final Thoughts 
The above study was initially run using data from 1950-2014. The overall results mirrored those of the most recent 21-year period 1994-2004. A hypothetical $10,000 investment in S&P 500 (excluding dividends, fees and taxes) grew to $1,228,461 using buy & hold. Missing the 50 Best S&P 500 days trimmed results to just $104,275 while missing the 50 Worst days resulted in an eye-popping $23,091,315 (not a typo) balance on December 31, 2014. The combination of missing both the 50 Best and Worst S&P 500 days saw $10,000 grow to $1,960,055, still a substantial outperformance of buy and hold.