SPY SPDR S&P 500

The “Sell in May” thesis is strongly backed by market performance statistics going back over six decades. Depending on which index you look at (Dow or S&P), the strong six months from November to April have outperformed the weak six months of May to October by an average of 6 to 7 percentage points per year since 1950.

Anyone can see that markets tend to make summer-fall market dives that provide big buying opportunities, regardless of the particular economic catalyst(s). And the subsequent winter-spring rallies are ripe for profit-taking before the summer doldrums (and Wall Street vacations) come round again.

This seasonal strategy is not fool-proof, of course. But if portfolio managers have made decent gains in a six-month period, chances are they will play the odds in their favor and take substantial profits before they possibly erode.

Thus, it’s easy to see how “Sell in May” becomes self-fulfilling. It’s not just automatic because the calendar flipped past April. It’s relative to where you’ve been and what you’ve done in terms of gains and losses. In the context of big gains from a classic October bottom, the temptation for the buy-side to cash in ahead of the high-probability “sideways-to-lower” trade into summer is simply irresistible.

In short, since they were all mostly long from the bottom, they can’t afford not to do some simple re-allocation when they know the PMs standing next to them are likely to feel the same way.

In this 3-year bull market, 2009 was a year you were better off staying invested, while in 2010 and 2011, the seasonal trade worked.

So, what do you think happens in 2012? Does this May tilt you toward the seasonal effect because of the big gains already on the table?

Or do you see a simply "sideways-to-lower" trade with economic catalysts being fairly balanced?

Anybody still a raging bull?

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