Instead of looking at what traders need to know for the week ahead like I usually do on Tuesday, I want to review something you need to know for this month.
It’s the beginning of June, historically one of the six worst months of the year (and the worst for tech stocks specifically but we’ll get to that in a moment).
The six worst months are determined by that old Wall Street saying, “sell in May and go away.”
There’s a lot of history behind that saying. It began as a warning for stockbrokers to get out of London before the summer heat made the city unbearable.
The London Stock Exchange was one of the world’s most important financial centers by the early 1700s.
As its importance grew, so did London’s problems. By the 1800s, like many large cities, London was an unpleasant place to be in the summer.
Instead of explaining the problem in detail, I’ll just note that the summer of 1858 was known as the “Great Stink.” Although the problem had been growing for years, that summer the heat, combined with industrial and human waste that was poured directly into the River Thames, produced an unbearable stench that shut down much of London.
For years before the Great Stink, those with wealth would leave London for the more pleasant-smelling countryside. The goal of a stockbroker was to accumulate enough money so that he could “sell in May and go away, do not return until St. Leger’s Day.” St. Leger’s Day is an annual horse race held in late September that’s been around since 1776.
A Better Investing Strategy
While the idea of “sell in May” has a colorful history, it stands up to quantitative testing. Since 1950, the Dow Jones Industrial Average delivered 92% of its price gains between November 1 and April 30. Avoiding the worst six months sidestepped the worst of several bear markets. Similar patterns are seen in global stock markets.
Of course, there are better seasonal strategies (I use a lot of them in my research service, Precision Profits). Rather than focusing on six months, we could look at just one-month periods. In doing so, we see that June is a bearish month for tech stocks.
As the chart shows, June is often the single worst month of the year for Invesco QQQ Trust (NASDAQ: QQQ), an ETF that tracks the Nasdaq technology index.
In this chart, each bar shows the mean return for the month. The mean is the midpoint. Half of the years deliver a better return. Half deliver returns worse than the chart shows.
Similar charts show that June is the worst month of the year for Alphabet (NASDAQ: GOOGL) and Apple Inc. (NASDAQ: AAPL). Not surprising considering they make up a bulk of the index.
An Action Plan for Trading in June
To trade this seasonal trend, traders can buy put options. Interestingly, GOOGL is weakest in the first half of June while AAPL is weakest in the second half of the month.
This means traders can buy put options on GOOGL expiring on June 18. If this is a typical June, that trade can be closed with a gain around the 15th of June. At that time, buy a put option on AAPL expiring on July 2.
This strategy is consistent with the worst six months strategy that has been known for more than 200 years. It’s just been updated for the 21st century and uses two of the stocks that have defined the current century perhaps more than any other.
Michael J. Carr
Editor, One Trade
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