Most everyone has heard the expression “Sell in May and Go Away” but I’ll bet many investors do not know why. Statistically May signals a period of time in the stock market when returns are minimal at best, if not negative. This period of time runs May to November.
This is a timing strategy, where you would sell your stock holdings in May and buy bonds to hold till November. At the beginning of November you switch back to stocks until May and you repeat year after year. This is called the best six month theory. You might be reading this and thinking ” Yea, right she’s a nut job” but there is enough historical accuracy to support this theory.
Many investors and financial planners pay attention to it even if they do not fully participate, it’s more of an indicator rather than a strategy. Many analysts say that you can not time the market, but it’s hard to argue that it’s not a good idea when you look back at its history.
Here is some history; since 1950, the DOW (Dow Jones Industrial Average) has had an average gain of 7.4 percent from November through April, and has only averaged 0.4 percent from May through October. If an investor put $10,000 into the DOW starting in 1950 during the best six month period (November through April) and switched to bonds during the worst six month period (May through October) and repeated the process through 2009, they would have a return of $527,388. according to the Stock Traders Almanac.
If they invested that same $10,000 from 1950 through 2009 for only the worst six months May through October they would have a $474. loss. Pretty amazing results I’d say. Then you need to keep in mind we are talking about the DOW only 30 stocks.
This strategy or indicator works differently with the other indexes. Take the Nasdaq, according to the Almanac it has the best eight months, which goes till the end of June. In addition to coming into a seasonally weak period for stocks, you could keep your eye on 30 year bond prices, they usually hit bottom about June. Gold and silver have started selling off in the last few weeks and historically they are weak during the summer months.
These are just ideas for some other trades. Of course the past performance is no guarantee of future results and with the Fed scheduled to stop easing in June, that very well could effect the outcome this year.
We have already had a stunning run in the market this year, many analysts and investors are calling for a pullback. Then there are those that are saying that foreign investors will look to invest in American companies because of our improving economic numbers and the economic trouble in Europe and China.
The bad news from China is the trade decifit is growing and slowing growth has economists worried about a hard landing. Spain has been in the news leaving investors wondering if it is the next Greece, the stock market could be in for a much bigger pullback than many are thinking. So whether or not you want to sell in May and go away, be aware of what typically happens during the summer and be prepared to make some changes in you investing style to manage your risk.
As always, no matter how you trade long or short may all of your trades be profitable!
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