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The Optimism Cycle: Sell in May

Last Updated on 10 February, 2024 by Rejaul Karim

The Optimism Cycle: Sell in May” delves into the fascinating seasonal patterns of stock returns, posing the intriguing hypothesis that these patterns are influenced by an optimism cycle. On average, stocks are observed to deliver close to zero returns from May through October, a trend that the author, Ronald Q. Doeswijk, attributes to changes in investor sentiment throughout the year.

As the year-end approaches, investors often develop overly optimistic expectations for the coming year, leading to the observed summer lull in stock market performance. By exploring a global sector-rotation strategy based on this theory, the paper uncovers profitable opportunities.

Additional findings include parallel seasonal patterns of global earnings growth revisions and the initial returns on IPOs, both of which lend support to the optimism-cycle hypothesis. This captivating study provides fresh insights into the psychological underpinnings that influence stock market performance and seasonality.

Abstract Of Paper

On average, stocks deliver close to zero returns from May through October. We hypothesize that this seasonal pattern is caused by an optimism cycle. With year end approaching, investors start to look towards next year, often with overly optimistic expectations. Several months into the year, the initial optimism becomes hard to maintain and the stock market experiences a summer lull. A global sector-rotation strategy based on this theory appears to be highly profitable. Global earnings growth revisions follow a seasonal pattern parallel to that of the stock market. Investors’ optimism as measured by the initial returns on IPOs almost completely captures the results of the sector-rotation strategy in a separate analysis for the US stock market. All these findings support the optimism-cycle hypothesis.

Original paper – Download PDF

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Author

Ronald Q. Doeswijk
Independent

Conclusion

In conclusion, Ronald Q. Doeswijk’s “The Optimism Cycle: Sell in May” examines the compelling hypothesis that an optimism cycle influences the seasonal patterns of stock returns. By analyzing the near-zero returns observed from May to October, the study pinpoints investor sentiment as a potential driving force behind these regular fluctuations.

Moreover, the research highlights the profitability of a global sector-rotation strategy based on this optimism-cycle theory and uncovers parallel patterns in global earnings growth revisions and initial returns on IPOs.

These insights, when considered together, provide strong evidence in favor of the optimism-cycle hypothesis, shedding new light on the intricate relationship between investor psychology, seasonality, and stock market performance. Investors, market analysts, and professionals can harness the knowledge gleaned from this study to refine their decision-making processes and enhance their understanding of the ever-evolving financial landscape.

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FAQ

Q1: What is the main hypothesis explored in “The Optimism Cycle: Sell in May”?

The paper explores the hypothesis that seasonal patterns of stock returns, particularly the near-zero returns observed from May through October, are influenced by an optimism cycle. The author, Ronald Q. Doeswijk, suggests that as the year-end approaches, investors tend to develop overly optimistic expectations for the coming year, leading to a summer lull in stock market performance.

Q2: How does the paper propose to capitalize on the optimism cycle?

The study proposes a global sector-rotation strategy based on the optimism-cycle theory, suggesting that investors can capitalize on seasonal patterns by adjusting their sector allocations. The paper finds this strategy to be highly profitable.

Q3: What additional findings support the optimism-cycle hypothesis?

The research identifies parallel seasonal patterns in global earnings growth revisions and the initial returns on IPOs, both of which align with the proposed optimism cycle. These findings provide additional support for the hypothesis that changes in investor sentiment throughout the year contribute to the observed seasonality in stock returns.

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