The stock market has been relatively volatile this year. In March, the Dow Jones and the main indices had their worst and best days on record as traders tried to understand the coronavirus pandemic.
In recent days, these indices have been on an upward trend as more countries start to reopen their economies.
Indeed, the Nasdaq 100 index has already turned positive for the year while the other ones are not way behind.
As a result, many traders have been talking about the “sell in May and go away” concept. In this report, we will look at what this concept is and whether it is a good way to make money.
What is sell in May and go away?
The idea behind selling in May and going away has been around for years.
Ideally, it was suggested after multiple researchers found that stocks tended to do well between November and April. The proponents argue that you will make money by either staying in cash or money market funds than in stocks between May and November.
Most proponents also believe that the idea originated from London, where merchants and bankers would sell everything ahead of summer and escape to the countryside.
According to Fidelity, the S&P 500 has gained by about 2% between May and October since 1945. This compares to the 6.7% average between November and May.
Another study showed that the S&P 500, which tracks the biggest firms in the US, has been positive in most of this period.
Why this is a bad idea
There are two main reasons why “sell in May and go away” is a bad idea.
First, while the stock market tends to perform better between November and May, the reality is that very few participants follow this rule.
If they did, then the results would be visible in the results of big investment banks and hedge funds. However, in the past, these companies have continued to make billions of dollars throughout the year.
This is an indication that the strategy does not work.
Second, at DTTW, we believe that trading is usually a better way of making money than investing. You can read our thinking about the two here.
In short, while we believe that some of your funds should be in long-term investments, we believe that you can make more money by trading.
This is partly because with trading, you make money when the market is rising and falling. Indeed, most of our traders made most of their profits during the volatility that emerged.
In fact, our company was featured in this report by the Wall Street Journal.
What will happen in the coming months?
In the next six months, we expect more volatility in the market, which will create valuable opportunities for traders.
First, with many countries starting to reopen their economies, there is the question of a second wave of infections. Such a wave or the probability of it will create volatility, which will be a good thing for traders.
Second, the US will be going through an election. As the biggest economy in the world, its elections tend to move the market.
Third, there is talk of a US and China trade war, which will also create opportunities for traders
Fourth, with the US economy imploding, there is a chance that the Fed will implement negative rates.
Finally, we will see significant movements in equities as companies release their second-quarter earnings. We believe that most of these earnings will be weak because little action has been going on in the quarter.
Conclusion: What to do as a trader
The media likes to hype several concepts. Furthermore, it is the way they make their money. The same is happening with the hype of buying in May and going away.
As a trader, we recommend that you stay active in the market and take advantage of the opportunities that will come your way.