Most readers will have heard of the stock market saying ‘sell in May and go away’, which is based on the historical tendency for stocks to generate most of their positive returns during the six-month period from 1 November through 30 April.
Since 1950, the Dow Jones Industrial Average has appreciated 7.4 per cent on average during this favourable period, versus only a 0.4 per cent average return in the period from 1 May to 31 October. So the argument is: why bother taking the extra risk for such a small return and not just take the cash a park it away safely after all you can make more on a cash deposit or in Treasury Bonds?
Of course seasonality is a guide not a guarantee and markets can be distorted by factors such as quantitative easing (QE), in which UK and US governments have both indulged during the last couple of years, although I am not expecting a surprise announcement like last August.
The stock market (and I refer principally to US stocks) has been very strong in the historically favourable six-month period just ended. The Dow Jones index gained 14.5 per cent between 1 November and 30 April. The S&P 400, also known as the Midcap 400 or the midcap index, did even better, adding an amazing 22.5 per cent.
The Midcap can be traded via an ETF (exchange traded fund) such as the SPDR MidCap 400 ETF (NYSE:MDY), which has newly hit an all-time high but gets very little press. In the UK the FTSE250 would be a similar comparison, which many do not realise can be traded via a spread bet on an ETF – such as the iShares FTSE 250 Fund (LSE:MIDD) – but let’s get back to seasonality.
Markets to drift off in May/June?
The month of May has started off a bit weaker and after the recent strong run it should not come as a surprise if we do get a sell off and overall the major indices drift before we eventually see markets pick up again with a strong rally at the end of the year.
Of course the whole stock market does not stop, so there are still plenty of opportunities in individual shares and sectors. It’s no surprise that the sectors that tend to do better over the May to October period are the more defensive sectors, which can also be accessed via a spread bet or contract for difference (CFD) on ETFs, such as consumer staples (NYSE:XLP), healthcare (NYSE:XLV) and utilities (NYSE:XLU).
Commodities, metals and mining
I would stay away from energy (NYSE:XLE) and metals and mining (NYSE:XME) for at least the next few months.
Commodities, which have had such a strong run, also are well overdue a pullback, especially the hot markets such as silver, cotton, sugar, crude oil and copper.
Of course we should not just generalise and lump all commodities together, I would be careful about shorting grains over the summer as weather related issues could cause big moves in wheat but, overall, I believe a pullback of an average of 20 per cent is coming for most commodities. Copper looks set for a good fall as the housing market and industrial usagae continues to weaken over the next few months especially from China.
Before you try financial spread betting it is well worth getting some good advice and training. Spread betting veteran Vince Stanzione has been trading for over 25 years and has produced a course, ‘Making Money From Financial Spread Trading’, which is a 160-page workbook, two and a half hours of DVDs and a members-only website. To find out more about how you can make Maximum Trading profits in minimum time go to www.fintrader.net.