Wall Street has a number of age-old adages about investing, and every May one of the classics pops up again: “sell in May and go away.” The justification behind the saying is that the U.S. stock market has historically underperformed during the months of May to October.
In fact, since 1950, the Dow Jones Industrial Average has averaged just a 0.3 percent return from May to October compared to a 7.5 percent gain from November to April.
If you're skeptical of this trading strategy because it seems overly simplistic and extremely overexposed, recent history is on your side. In fact, as Carl Quintanilla pointed out this morning on Twitter, the S&P 500 has delivered gains in the last three consecutive Mays.
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From May 1 to June 1 of 2015, the S&P 500 delivered a very modest 0.1 percent gain. However, during that same stretch in 2014, the market surged 2.1 percent. The market delivered an even larger gain of 3 percent in March of 2013.
If you extend the timeframe out from May 1 to November 1, the S&P 500 has delivered a average gain of 5.7 percent in the past three years, well above its historical average during that part of the year.
Barrons reports that a number of option traders seem to be betting that “sell in May” will make a comeback this year.
One way to trade a major May sell-off is to buy May 27 and/or 30 calls on the iPath S&P 500 VIX Short Term Futures TM ETN VXX and also buy upside calls on the SPDR S&P 500 ETF Trust SPY as a hedge.
Disclosure: the author holds no position in the stocks mentioned.
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