Followers of the price gyrations of the various stock market averages often refer to a notion that investors should “sell in May and go away” until October or November.
The market seems to lack a strong upward bias in the warmer months of the year.
If you look at the major averages this year, they have indeed peaked in late April or May and are now struggling to make any significant headway to the upside.
This is the general market condition as of this writing. Year to date, the stock market is higher than it was on December 31st. The numbers are as follows:
Average YTD Gain
Dow Jones Industrials +0.15%
NYSE Composite +1.29%
S&P 500 Average +1.65%
S&P Small Cap. +3.89%
S&P Mid. Cap. +5.11%
NASDAQ +7.02%
Of course, what the averages have done year-to-date indicates nothing about what might happen for the rest of the year. No historical data of any kind can foretell what will happen in the coming months.
We do however have recurring price patterns that can indicate what might happen. Still, historic price patterns only indicate a likelihood, not a guarantee of future results.
So as market experts or professionals (or however you refer to your investment advisor or broker) we don’t know with certainty what is going to happen to the market averages. The markets appear to be churning for now, consistent with the sell in May notion.
The Stock Traders’ Almanac indicates that the year before a presidential election and the fifth year of each decade have historically been the some the strongest performing years on Wall Street. So if you believe this fifth year of the decade will perform true to its history, this may not be a year to have your investment money in cash.
Those of you who know something about statistics will also be aware that the performance of the market averages indicates nothing about the performance of an individual stock.
It is true that stocks tend to move in the same general direction, yet even that notion doesn’t guarantee that your investments will perform in line with the overall averages. Your investments might be outliers, performing contrary to the overall market, either higher or lower. So you could sell in May only to find that the stocks you sold actually moved higher.
You might be wondering why anyone would risk their money in the stock market either through the purchase of individual stocks, mutual funds or exchange traded funds or any of the other myriad market investments. The answer: people participate in the markets because enough people win to endorse the activity in a general way.
Further, if you have money beyond your living expenses, you have to find a way to move the value of your excess funds into the future. If you have money leftover at the end of the month, you are participating in a form of investing whether you know it or not. Your only choice is where you invest, whether it’s with an advisor or a bank or stuffed in your mattress.
Remember: there is no riskless investment. Even cash can lose value over time.
So how do you participate in the investment markets successfully? Investments (market averages as well as individual investments and exchange traded funds) have pricing patterns that tend to repeat themselves. Notice I said “tend to repeat.” I did not say “guaranteed to repeat.”
As these patterns occur you can locate price points at which you can jump in, expecting higher prices in the direct future. Still, after you have established your investment position, you have to watch your investments and always be ready to sell if they don’t perform as expected. Poor portfolio performance is usually associated with hanging on to losers far longer than is prudent.
During periods of market churn, I spend many hours looking for those stocks that are performing better than the market averages. I am looking for the best performing stocks despite the market performance. If I assess that the price movement is sustainable, I look for potential buy points where I hopefully can make some money.
All of this takes some great resources (which aren’t free) as well as a commitment of time and most of all, a willingness to take action especially if the stock price doesn’t perform as expected.
As I have mentioned before, there is no better way to participate in the markets than to continually pay attention to your outcome or have someone else do this for you.
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