Lessons from the Pros

Education Resource

Sell in May? Or Stay in Play?

The S&P declined 8.2% in May 2010 and 6.3% in May 2012. In 2011 it was flat but down 9.4% by the end of the summer. No wonder many pundits have revived the adage “Sell In May, Then Go Away” as worrisome advice for the buy-and-hold investor. This year the SPY was up the first few days in May—in fact it recently hit a record high—but there are plenty of reasons to be worried. A still-struggling economy… the possibility of contagion from much worse economic conditions in Europe… new inflation fears pressuring the bond market… the possibility of a ground war in Syria… how would any buy-and-hold investor NOT consider cashing in their chips after a great run and taking their profits in this environment?

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There are solid macroeconomic reasons that May-through-summer is not a robust time for the markets: school’s about to let out, many people will be on vacation, there are no major retail initiatives as there will be in the fall. Companies seem to weight their bigger announcements toward the earlier months of the year so the net effect is that there’s less to boost a good market, allowing the “Nervous Nellies” to create selling pressure. That’s the theory anyway.

And, for those following historical performance, since 1950 the DJIA has averaged just a 0.3% gain between May and the end of October, compared to 7.5% the rest of the year. In 11 of those years the Dow fell 10% or more between May and the end of October, but in only three November-April periods did it fall 10%. (Stats are from Stock Almanac as cited by Matt Krantz in USAToday).

At Online Trading Academy, of course, we take all this with a huge grain of salt. We never advocate buy and hold investing (or “buy and hope”, as many of our instructors term it) because that means missing all the market fluctuations and profit opportunities which are available to any trader or active investor willing to follow our simple rules-based strategy for entering and exiting the market based on an imbalance of supply and demand. One pundit, Seeking Alpha’s Dr. Duru, says the real concern in May and summer is increased volatility. At Online Trading Academy, we see volatility as a good thing.

DISCLAIMER This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.