When I turned my calendar over to May a few days ago I couldn’t help but take a deep breath and sigh. As experienced investors know, the next six-month stretch has long been proven to be the stock market’s worst. Year after year, the U.S. stock markets perform much better between November and April than they do May through October.
In fact, according to the Stock Trader’s Almanac, if you had invested $10,000 in the Dow Jones Industrial Average on May 1 and sold it on Oct. 31 each year since 1950, you would have lost money. That 61-year investment of $10,000 would now be worth just $9,261 today. However, if you had invested that same $10,000 on Nov. 1 and sold on April 30 of the same years, your investment would have grown to almost $610,000.
And while all the gains in the Dow Jones Industrial Average since 1950 have occurred during the seasonally strong months and were especially evident in the past two years (up
15 percent both years), there’s no guarantee the same will occur this year. As an investor, that leaves you with a few options:
Option 1: Play the trend.
If a 60-plus-year trend is enough to fuel your confidence, you can certainly sell all your stock funds and wait for the calendar to reach Nov. 1 to reinvest. If the trend holds, you’ll be sitting pretty. However, if this is the year that bucks the trend — and there will be a year that does — and the current stock market rally continues, you’ll end up leaving money on the table.
Option 2: Do nothing.
If you like the feel of the current stock market rally, you can opt to leave your funds where they are and hope it continues. Of course if the year shapes up like the last two, the profits earned in the first five months may be nowhere to be seen come November.
Option 3: Track market signs and move as needed*.
*Disclaimer: I am 100 percent biased toward this approach.
Not based on history or hunches, this approach is based on a stock’s, or any tradable security’s, current performance and guides you to buy and sell as “signals” deem necessary. By signals, I mean a stock’s 50- or 150-day moving average. For example, when an investment moves below its 50-day moving average, that’s a signal to sell. An even stronger sell signal is when it goes below its 150-day moving average. And as you might guess, the opposite is true on the upside — when a stock moves above its 50- or 150-day market average, it’s a signal to buy.
But even if you’re not comfortable with a 50-day wait, you can employ the same approach using a stock’s highs and lows. Simply take a rolling
10-day average of either of those two statistics to establish a market average. When the current average breaks below that number, it is a sell sign. Conversely, when it goes above it, it’s a buy signal.
All the numbers and averages you need to employ this approach are readily available online or in stock listings. Yes, it takes a bit more effort but it allows you to rotate out of weakening assets classes and move your money into stronger ones where the yields will be higher.
In the end, this year’s market could rally or it could fizzle out like it has so many times before, but you don’t have simply sit by and watch. In fact, by taking a steady, mechanical, non-emotional approach to your investing, you may find yourself greeting every day of the next six months smile.