Sell in May but Don't Go Away

April 25, 2013, 11:13 am ET, BY Thomas H. Kee Jr- Editor, Stock Traders Daily| Editor: Thomas H. Kee Jr. (Follow on LinkedIn)

The Trader's Almanac and traditional investment philosophy will tell you to "Sell in May and Go Away".  Based on Historical measures markets weaken after May and through the Summer, so making money becomes more difficult.  For example, last year the S&P 500 ETF (NYSEARCA:SPY) declined by about 10% after April 25 (I am comparing the results from the day I wrote this article), but then recovered. 

Yes, declines happened after May last year, but then the market recovered and basically ended the year flat as compared to its levels on April 25, but between that date and the end of the market did nothing in 2012.  At the same time, risks were high, declines happened, and the 'Sell in May' theory aims to help investors avoid situations like that.  The worst performing market based ETF during this time in 2012 was the NASDAQ 100 (NASDAQ:QQQ), which was down 2%, the strongest was the Russell 2000 (NYSEARCA:IWM), and the Dow's ETF (NYSEARCA:DIA) ended flat.

As a point of fact, last year the market experienced virtually all of its gains between January 1 and April 25, and then did nothing until January 1 of 2013.  Coincidentally, the market this year has increased significantly between January 1 and April 25, so far almost like a mirror image of 2012, and if that image develops completely the rest of the year could see little to no growth with declines in between.

Although this may cause investors to consider selling in May and going away, there is an alternative.  Although the market itself comes under pressure, proactive strategies that can make money regardless of market direction do not have to suffer like that.  One in particular is the Swing Trading Strategy offered by Stock Traders Daily.  During the same time as the market fell by almost 10% and ended the year with virtually no gain after April 25, 2012, the Swing Trading Strategy was up almost 20%. 

This is not the only proactive strategy on the market; there are others, but all proactive strategies that are capable of making money when the market comes under pressure like it usually does after May every year have similar characteristics.  Some use a combination of fundamental and technical analysis to achieve a rationale for a combined long-short strategy that protects money on the downside while allowing assets to perform when the market increases.  Typically, strategies it like this incorporate option hedging techniques with the goal of protecting assets in case of market decline too.

Another way of approaching this is to use market based ETFs like the Swing Trading Strategy does.  In this case, IRA accounts can also take advantage of downside market moves because strategies that use ETFs instead of short positions never actually short the market, instead they buy ETFs that are already short by nature and this is okay for IRAs.  This is highly beneficial for people who are interested in protecting their retirement assets.

Although "Sell in May and Go Away" is a theory that suggests investors should not attempt to make money from the market after May, there is plenty of money to be made during the summer months.  "Sell in May and Go Away" is an old-school theory for traditional investors, and something proactive investors should take advantage of.  Because we know opportunities will come as a result of these traditional followers, we can use it to our advantage and gain a competitive edge.

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