It's May, and if recent history is your guide, now is the time to sell stocks and go away for the summer. As the saying goes: “Sell in May and go away.”
Since 1950, the Dow Jones Industrial Average has averaged just a 0.3% gain during the six-month period of May through October. In the November through April stretch, meanwhile, the Dow has averaged a 7.3% gain every year since 1950.
But even though the old British adage of selling in May has only applied to U.S. markets since the second half of the 20th century as the country became less agrarian, it's time to start rethinking that strategy.
“Rather than selling in May, we prefer to take a defensive posture,” said Jeff Hirsch, editor-in-chief of the Stock Trader's Almanac.
“Stops are tightened, new longs are limited, losing or underperforming positions are cut and we consider putting some capital in bonds and/or bearish funds,” he added. “Keep it simple, but don't go away.”
InvestmentNews: What's the original idea behind 'sell in May and go away?'
Mr. Hirsch: The phrase comes from an old British saying about selling in May and going away and coming back on St. Leger's Day [historically celebrated with a horse race on the second Saturday in September]. Everyone would go away for the summer and not a lot of business would get done. That period happens to coincide very much with the Memorial Day through Labor Day lull in the U.S.
InvestmentNews: What is your advice regarding the strategy of selling in May?
Mr. Hirsch: We might sell in May, but we don't go away. We tighten some stops, limit new longs and take some additional bond positions, usually through the iShares Core Total U.S. Bond Market ETF (AGG).
The Fed is still very accommodative. Even with the tapering, rates are still at zero. And there is some decent economic data starting to show up.
We are expecting some form of correction of maybe 10% to 15% over the next six months, but it doesn't mean you have to just sell willy-nilly. You can sell some underperformers and take some defensive positions.
InvestmentNews: Assuming investors do sell in May, what areas are likely to benefit?
Mr. Hirsch: Aside from bonds, which is always a place for safety during times of trouble, the utility sector does well. We're getting exposure through the Utilities Select Sector SPDR (XLU). That's a play on the pickup in the use of air conditioning along with some carryover from heating and lighting season. We'll also look at shorting some sectors like cyclicals, materials, industrials and transports.
InvestmentNews: Are there any factors to consider based on where we are in the presidential-election cycle?
Mr. Hirsch: As part of the four-year presidential cycle, we're coming into the worst two quarters, which will be followed by the best two quarters. Historically, the Dow has gained an average of 50% from the low point leading up to the midterm elections to the high point within six months after the midterms.
InvestmentNews: We've been mostly talking about how these patterns apply to the Dow, but does this also apply to smaller-cap stocks?
Mr. Hirsch: Regarding the Nasdaq, tech and small caps, we're still riding a wave and enjoying some decent gains, because when it comes to something like the Nasdaq 100, it's more like an eight-month strategy. Our stops will be a little bit looser because it tends to run a little bit longer in the bullish seasonality.