Reuters Money

Anyone who’s been investing for a while has probably heard the homily “Sell in May and go away.” It’s a lilting reminder that the worst time of the year for stocks is usually the summer and the early fall. Going back decades, most of the money made in the stock market is made from November through April.

Some reasons behind this theory: People tend to feed their retirement accounts and invest bonuses early in the year. They go on vacation and ignore the market over the summer. Traders come back in September and dump companies that aren’t performing according to expectations.

Jeffrey Hirsch, publisher of the Stock Trader’s Almanac, offers some pretty persuasive numbers to support the argument. If you put $10,000 into the market on November 1, 1972, and spent 37 years selling all of your holdings on April 30 and rebuying on November 1, you’d have more than $160,000 today. You would have earned an average annual return of 7.4 percent, according to Hirsch’s data. If you’d taken that same $10,000 and, starting in 1972, done the reverse,  investing every May 1 and selling every October 31, you’d have $7,863 and an average annual return of 0.4 percent.

But experts are suggesting that this year, the summer sell off could be mild. “Sell in May takes on a different twist during the third year of a president’s term in office,” says Sam Stovall, chief investment strategist of Standard & Poor’s. On average, the S&P 500 stock index rises 1.3 percent from May 1 through October 31, he reports. But in the third year of presidential cycles, returns during that same six-month period are 2.7 percent. Stock prices rise 70 percent of the time during the downer months of May through October when it’s the third year of a president’s term, he said.

So, where does that leave investors now? Many have sizeable gains, with the Dow Jones Industrial Average up significantly year to date, after rising 18.82 percent in 2009 and 11.02 percent in 2010. But that isn’t a sell signal, and if you do sell, what are you supposed to do with your cash while you wait for the November re-buy? Here are some thoughts.

Don’t just sell, rotate

Stovall believes that the best move for equity investors now isn’t out of stocks, it’s out of aggressive growth stocks and into defensive stocks, such as consumer staples and healthcare companies.  “When the going gets tough, the tough get to eating, smoking and drinking. And if they overdo it, they go to the doctor,” he quipped in a recent interview.

Looking at the years between April 1990 and April 2011, he found “while the overall market was eking out an anemic advance, the defensive issues — consumer staples and healthcare, in particular — were frolicking in the surf, posting average price gains of 5.0 percent and 4.8 percent, respectively, to the S&P 500′s average rise of 1.4 percent.” Stovall published a report on Monday suggesting investors simply rotate into those sectors instead of exiting the market altogether.

Be mildly defensive

Hirsch is also telling his clients not to go crazy running for the exits. “It’s not necessarily ‘Go Away’. It’s ‘Become more defensive,’ ” he said. The summer could be weak but he sees it as part of a five- to six-year period of up and down, mostly sideways, movements for stocks, so he’s recommending incremental changes around the edges.

“It’s a good time to take some profits, tighten up stop-loss orders, hold up on taking major new positions in stocks, and look for better prices in the weaker summer months,” he said. “We might not get as much of a pullback as in other years, but things are a little precarious.”

Investors with an eye on the long term can pick up shares of their favorite stocks during summer declines, he suggested.

Keep your eye on the prize

The “sell in May” plan did not work in 2007 and 2008, when the summer months did better than the winter months, Hirsch noted. The last time that happened was all the way back in 1972 and 1973, and that preceded one of the biggest bull markets in U.S. history by about nine years. Hirsch, who recently wrote a book titled “Super Boom: Why the Dow Jones Will Hit 38,820 and How You Can Profit From It,” said the current stock market behavior is heralding another golden era of stock investing.

He suggests that the cycle starts with war and crisis, winds through inflation, takes advantage of a big new technology and then goes boom, in a good way. His best prediction is that the start of the next big boom is five or six years in the offing.

If he’s right, that might make this spring’s sell-or-buy decisions less weighty, he concedes. “We’re in the launching pad.”