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Sell in May and Go Away? Not So Fast

By Richard Schmitt

SAN FRANCISCO ( TheStreet) -- Surely you've heard the old stock market saying, "Sell in May and go away" (until November).

Although this proved to be useful advice in years past, it no longer applies in a stock market where volatility, rather than long-term appreciation, seems to rule the day.

Sure, looking at recent S&P 500 performance supports this saying.

After posting an impressive 11% rise during the first four months of 2012, the index slipped this month.

In 2011, the S&P 500 index gained 8% during the first four months, only to give up all those gains by year-end.

Similarly, in 2010, the index advanced 6% from January through April, bumped around to end up almost flat from May through October, and rose in November and December by another 6%.

Further support comes from a Bank of America report, which found that since 1928, the S&P 500 index gained on average 5% during the November-through-April period, but only 2% for the May-through-October period.

So it would seem to follow that investing in a stock market that languishes through summer and fall may not be worth the trouble, when you can typically garner more of the market's gains in winter and spring.

Not so fast.

Instead consider that the broad U.S. stock market has been spinning its wheels trying to rock out of a rut since the turn of the millennium.

Two major downdrafts in 2002 and 2008 followed by equally dramatic recoveries have left the stock market revisiting levels first reached over 12 years ago.

Volatility has now become a major market force. If the stock market's current sideways, but volatile, trend has replaced its former upward trend, which trend is your friend?

You can make a volatile market your friend by buying low and selling high at the right times and in the right amounts.

For example, consider a situation where you pay $400 to buy 100 shares of a stock for $4 a share.

When the stock's share price rises to $5 by the end of the day, you decide to sell 20 shares for $100 (= 20 shares x $5 share price), leaving you with $100 cash and 80 shares of stock.

A subsequent decline in the share price to $4 the next day leaves you with a total portfolio of $420, comprised of $100 cash and 80 shares of stock worth $320 (= 80 shares x $4 share price).

Looking back, your astute trade at the end of the first day netted you a gain of $20 (= $420 - $400) over what you would have had if you had just held onto the original 100 shares of stock still worth $400.

This example highlights how strategic trades between cash and stock can squeeze gains out of a volatile market headed nowhere.

Each stock trade either sets up a gain by buying low or captures a gain by selling high.

When done within a retirement savings portfolio, trades take the form of fund exchanges providing the further advantage of not triggering immediate taxes or direct trading costs.

With virtually all retirement savings plans allowing daily fund exchanges, an approach known as 401(k) daytrading takes full advantage of market swings through once-a-day fund exchanges between cash and stock market (such as S&P 500) index funds executed just before the market close based on the day's change in the market index.

The amount of each fund exchange into or out of the market index fund is determined by multiplying a fixed calibration factor of your choice by the change in the index you observe just prior to the market close.

For example, if you chose a $100 calibration factor, a 5-point increase in the S&P 500 index would call for a $500 stock sale taking the form of a fund exchange from an S&P 500 index fund to a cash fund.

401(k) daytrading translates daily fund exchanges in an uncertain market into lasting gains in your retirement savings, as long as you follow the funds' frequent trading rules. So don't stay away any day in May -- or in any other month for that matter.

This article was written by Richard Schmitt, author of "401(k) Day Trading: The Art of Cashing in on a Shaky Market in Minutes a Day" and an adjunct professor teaching retirement planning at the Edward S. Ageno School of Business at Golden Gate University.

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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