The Seasonal Anomaly and Trend model is one our first shorter term models. One of the components of this model is the Sell-in-May or Halloween effect. The Sell-in-May effect refers to the fact that historically the equity risk premium (“ERP”) between May and October has been lower than during the remainder of the year and therefore it might make sense for some investors to follow the saying “Sell in May and Go Away… and come back in October”. Our empirical findings show that the average ERP between May and October is 11.24% p.a. lower compared to the November to April period, thereby confirming the existence of the effect.

Inspired by the findings of Chan and Marsh (2018), we had a second look at how we trade this effect. In their paper, they show that there is a significant premium to be earned post the midterm election, which happens in November of the third year of the presidential election cycle (the first year being the year of the presidential election). Our findings show that the ERP of the S&P 500 is on average 24.92% p.a. higher during the November-April period following the midterm election than on other days. Once we account for this effect, the Sell-in-May effect becomes much less relevant.

What does this observation mean for us? We used to optimize the annual entry and exit points of the Sell-in-May to maximize the Sharpe ratio. This means we were not accounting for which year of the election cycle we were in. Going forward, we will use this additional information to help improve our Seasonal anomaly and Trend model. Depending on one’s point of view, we will increase our equity exposure between October of the third year of the presidential election cycle and April of the fourth year, or decrease the exposure for the remainder of the election cycle. This means our equity exposure, all other things being equal, will likely be slightly higher from November 2018 through April 2019.

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