“Sell in May and go away,” advises the trading maxim. However, as stocks hit record highs, a trader on the New York Stock Exchange recommends the strategy with a twist.
In an interview with Yahoo Finance, Jay Woods, chief marketing strategist at DriveWealth Institutional, recalled May 2020 when stocks were just beginning their meteoric rise. “‘Sell and go away in May’ was a phrase I actually joked about last year – like, where are we going?”
This year, he recommends investors get out and enjoy the reopening economies of the world – especially since many investors are betting on and can afford nice profits for the year. But he definitely does not advise investors to sell everything – just play a little defense if necessary and enjoy the fresh air.
“”[T]In his year people are ready to go away. Can’t wait to be a day away from my first shot, “Woods said, referring to the COVID-19 vaccine.” And May seems to be the time when people will actually – maybe – take advantage of those gains. ”
Seasonality explained in markets
The full axiom was originally, “Sell in May and go away and come back on St. Leger’s Day.” It has its root by doing City of London. Finance pros would go on vacation for about four months in May to escape the summer heat and return to the St. Leger Derby in mid-September. Traders and bankers in the US have appropriated the aphorism over the years and condensed it into its current form.
Many traders are still leaving their desks for the summer. Volume is drying up, liquidity is tending to decline, and the bearish summer tendencies are becoming a self-fulfilling prophecy – to a certain extent. The likelihood that markets will follow predictable patterns based on the calendar is known as seasonality and accounts for up to a third of a market’s price movement.
While it is a strong indicator at times, there can easily be overriding factors. Whole books and websites are devoted to the study, such as: The Stock Trader’s Almanacwhich was released since 1967. Author Jeff Hirsch has combined seasonality with other technical indicators to: a robust trading strategy over time.
On the alert for a break
Woods takes into account the current gains since the beginning of the year for the indices and sees the potential for a certain cooling.
“We could see a break in this market. It seems too obvious, but for the moment to see where we went and how strong this rally was – a break would be fine. And you put in the seasonality factor where April is the second is The busiest month in the last 20 years. Now we’re getting to that slowdown. We didn’t see it last summer, which was great. But this summer the rationale would dictate that we are going away, “Jay said.
Seasonality patterns also work over longer periods of time. Callie Cox, Senior Investment Strategist at Ally Invest, has broken down the events separately Year two of a young bull market for Yahoo Finance.
“”[I]It is typical of the bull market to lose a little steam in the second year. And that goes back to the low expectations and the high growth. Expectations are rising and making it difficult for the market … to exceed everyone’s expectations. And that leaves a greater chance for disappointment. And to be clear once again, we are not calling for doom and darkness. We just believe the market needs to take a breather for the next quarter or two, “said Cox.
When asked what steps an investor could take to improve their investments in the summer months, Woods emphasized the importance of a diversified portfolio, adding, “With general profits, you may want to slack off if that’s your prerogative, but in the long run these trends are phenomenal. “
Jared Blikre is a moderator and reporter focused on the Yahoo Finance Live markets. follow him @ SPYJared