Buckle up, champ.
Seasoned professional traders typically understand the investment theory behind 'Sell in May and Go Away,' but it is not always that cut and dry. Sometimes it might be better to hold through the summer, but sometimes it might be better to not only sell but also to establish short positions.
On this first day of May, the question is which will it be this time?
First, the rationale behind this theory is that markets swoon more often than not during summer months. The procedure is to sell in May and buy stocks back in October, or at least after the summer swoon, and avoid the typical summer losses.
However, in recent years this has not been the case. In fact, we have seen solid summer market rallies in the recent past, since the credit crisis, and this has made the old adage lose credibility. There was a reason for that though, a reason that does not exist today, and one that might make this summer look more normal that last year at least.
Since shortly after the credit crisis, central banks have been pouring approximately $60 billion per month into global equities, and when they do that during the slower summer season it can bolster stocks and completely counter the typical summer doldrums. This has been the case for years, but this year that is no longer true. The Federal Reserve and European Central Bank are not only no longer offering a combined stimulus, but they are a net drain on liquidity for the first time since stimulus was first introduced by Ben Bernanke.
With that, this summer is shaping up not only to be more like normal, but proably worse than normal. If liquidity levels are less than normal, the probabilities suggest that this summer should also be worse than normal.
Initially that may sound like short positions may be the best idea, but there is another option. Sure, if the market is weak one can make money from simple short-based ETFs like (DXD) - Get Report , (SDS) - Get Report , (QID) - Get Report , and (TWM) - Get Report , but when markets are weak volatility levels are also usually high.
Higher than normal volatility levels suggest that an investor can do more than just take advantage of short side moves. They can benefit from buying dips, too, so long as they remember that short term gains lead to long term success. Long ETFs would be used for that, so think about (DDM) - Get Report , (SSO) - Get Report , (QLD) - Get Report , and (UWM) - Get Report .
This year has so far offered opportunities on both sides, and although this summer is shaping up to be weaker than usual, it should be expected to provide opportunities on both sides, too.
Written by Thomas H. Kee Jr., President and CEO of Stock Traders Daily.
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