Question

1.There is an old saying on Wall Street: “Sell in May and Go Away.” This saying means that stock prices typically do not do well over the summer months. A blogger at the Wall Street Journal explains the reasoning:

“What’s up with ‘Sell in May and Go Away’? This must be the most telegraphed trading system out there. The idea is that traders go away, go on vacation, school is out, the summer doldrums, etc. all add up to it being a dull (or worse) market from May through September.”

a.Is “Selling in May and Go Away” an example of a pricing anomaly? Briefly explain.

b. If “Selling in May and Go Away” is a pricing anomaly, how would you be able to use it to warn an above-average return?

c.Is it likely that pricing anomalies will persist over time?

Answer 1

a.since the market is constituenly under performing in summer months.it shows the market is inconsistent.so'' sell in may and go away'' is an example of pricing anomally.

b. to use this pricing anomally to earn above average return,the investor can do following things.

1.short the stock and earn from price decline,or

2.buy at low price in summer months months and sell later on at higher price.

c.once so many retail investor get it know about it they ill start following the strategies dicussed in part(b) hence, the competition among investor will increase and the price anomally will eliminate in future. so it is unlikely that pricing anoally will persist over time.