Long Hot Summer? How To Ride The Summer Stock Market Waves.

“Sell in May and go away” has been the rule of thumb for many stock market investors and speculators since 1978 when it was first back-tested at Yale University. Since then is has often been debated and criticized by everyone from pundits to professors. It has been the easy way out for many investors in the past when faced with the tough decision of what do with your portfolio when the NBA season is over. However that old adage hasn’t worked over the previous couple of years and has some investors worried so we wanted to look at the best way to play, or avoid, the Summer doldrums.

Ok, so why the problem? Well for about 66 years from 1950 to 2013 the Dow Jones Industrial Average, for those of you that don’t know the DJIA is a priced weighted index of 30 stocks representing an array of different sectors of the American economy, and during the period from May to October 2013 this average had an average return of only 0.3% during the May to October period, compared with an average gain of 7.5% during the November to April period, according to a 2017 column in Forbes. The annualized return for domestic equity investors for the six months from May to October inclusive was a disappointing 4.9%. Conversely, returns from November to April were an astounding 16.3% annualized.

A wise investment advisor once said “call me old fashioned but I don’t structure my investment policy based on nursery rhymes” and he may be right as recent data suggest that this seasonal pattern may not be the case anymore. According to IBD (Investors Business Daily) in May of last year if an investor had sold stock in May 2016, he/she would have missed some lucrative runs. The NASDAQ ended April 2016 at 4775.36; it closed higher in May and soared in late June. The NASDAQ rose by 55% from the end of June 2016 until the end of January 2018.

So perhaps instead of just outright selling consider a rotation from one sector to another. In the Summer when there isn’t a lot of market moving events going on other than self-created drama by some people on twitter, volatility isn’t that high, as measured by the VIX, and typically the daily volume is substantially less so if there is breaking news it can make some of the high flyers or stocks with higher multiples move much more in either direction. So this strategy would advise investors not necessarily cash out their investments but would instead vary their portfolios and focus on products that may be less affected by the seasonal slow growth in the markets during the summer and early autumn, such as technology or health, rather than something that has potentially large swings in price like the FANG stocks. This would make for a much smoother ride into fall for those who want to stay in the market rather than the choppy waves of the Summer market.


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