Investor Insights:
- Since 1950, November stock trades have delivered an average annual gain of 7.5%.
- That’s good, but there are two ways to do better.
- I also have a secret strategy that generates incredible returns.
You’ve probably heard the saying: “Sell in May and go away.”
It’s a handy reminder that the worst six months for the stock market start in May.
Now, many investors know to sell in May. Not many know where the saying came from.
I want to give you a quick history lesson on that, because the very same trend persists today. And I have two great ways you can profit from it…
Suffering Through London’s Great Stink
It dates to a problem London, England, experienced in the 1800s.
London was one of the most important cities in the world by that time. It was also a beautiful city that provided impressive backdrops for global commerce.
Government officials hurried between buildings, creating laws that allowed modern society to flourish. Business leaders moved from stately homes to historic offices.
Traveling around the city was easy enough. London, at the time, was filled with picturesque horse-drawn carriages.
The horses created a problem that historians often ignore, though: Waste filled the streets. That, added to the smells of a crowded 19th-century city, made summers unbearable.
For example, the hot weather in 1858 led novelist Charles Dickens to write a friend: “I can certify that the offensive smells, even in that short whiff, have been of a most head-and-stomach-distending nature.”
Citizens who could afford to flee the city did so, leaving the poor to suffer through the Great Stink.
(Source: Punch magazine)
Traders and brokers on the London Stock Exchange were among the fortunate able to flee to the countryside.
And thus, the phrase “Sell in May and go away; do not return until St. Leger’s Day” was coined.
St. Leger’s Day is an annual horse race held in September. It marks the end of summer in England.
That explains why May to September is typically bearish. Money explains why October is bearish.
Before the end of World War II, money was a physical commodity. It was gold or coins, and currency backed by gold. The amount of gold a country owned limited the amount of money.
To meet the needs of the economy, banks moved money around. For example, when farmers harvested crops in October, money needed to be moved from cities to rural areas.
If a large trading firm needed cash in October, there might not be any available. Hence October’s notoriety for panics and crashes. Throughout the 1800s, autumn panics were common.
Now, you might be wondering how this is relevant for today’s market. It might be surprising, but this cycle still exists in the stock market.
And we have two ways to take advantage of it.
Trade No 1.: Prepare for the Best 6 Months
The best six months start soon.
Buying an index exchange-traded fund (ETF) on November 1 and selling on April 30 is one way to trade the seasonal trend.
An ETF is an investment that tracks a broad stock market index. The SPDR Dow Jones Industrial Average ETF (NYSE: DIA) mirrors the Dow, owning all 30 stocks in a single instrument.
Since 1950, the worst six months delivered an average annual gain of just 0.6% when using the Dow.
During the best six months, the Dow gained an average of 7.5% a year.
That’s good, but there’s a way to do better.
To improve the “best six months” strategy, track the moving average convergence/divergence (MACD) indicator.
MACD is a momentum indicator. You can learn more about it by watching my video.
Adding MACD to the best six months improves the average annual return to 9.1%.
With this improvement, we only buy when MACD is bullish. The chart below shows that MACD is bearish right now.
MACD for the Last 12 Months
Using a weekly chart, buy when MACD turns bullish.
Trade No. 2: An Even Better Way to Trade This November
You can increase your potential gains even more, and limit potential losses, with a call option.
A call option gives the buyer the right, but not the obligation, to buy the ETF at a specified price at any time before the option expires.
You won’t have to exercise the option to collect a gain. You could simply close the option with a sell order.
Options offer defined risks. You can never lose more than you paid for the option. This means risks are small in dollar terms since options usually trade for just a few hundred dollars or less.
For DIA, traders could buy June 19 $270 call options for about $1,300. This is the right to buy 100 shares of DIA at $270 any time before June 19.
Beginning in April, look at the weekly MACD for a bearish signal. When it occurs, sell the call. Otherwise, hold the call until it expires in June.
That’s it. Those are the complete rules for this trade.
Regards,
Editor, Peak Velocity Trader
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