When it comes to investing in stocks, it would be a lot easier if you could simply rely on cliches like “Sell in May and go away.” And this year some investors may be lured into following this old Wall Street saying as market leaders like software stocks ServiceNow (NOW), Atlassian (TEAM), Zscaler (ZS), Palo Alto Networks (PANW), and CyberArk Software (CYBR) have encountered selling pressure in recent days.
But is consulting a calendar an effective replacement for following time-tested buy and sell rules?
For the sake of argument, let’s say Atlassian, Palo Alto Networks and other software sector stocks do enter into a long correction beginning now, just a couple weeks away from the start of May.
Would you follow a dubious “strategy” of selling just because Cinco de Mayo is around the corner? And would you sell immediately or wait until May 1 — regardless of how far the stocks decline between now and then?
Or would you follow sound sell rules based on decades of market history? Selling on a sharp, heavy-volume crash below the 50-day line. Taking profits at 20%-25%. Locking in remaining gains to avoid letting a double-digit gain revert into a loss. These are far more reliable and effective rules on when to sell stocks than simply checking today’s date.
Keep in mind: Even if the “Sell in May and go away” cliche actually works out in any given year, what’s the Wall Street axiom that tells you when to get back in?
Investing In Stocks: Follow Rules, Not Calendars
Take what happened in 2018. The “Sell in May and go away” approach failed, as the indexes continued to move higher from May to September. A more effective strategy (for last year, that is) would have been to “always remember to sell in September.” Starting in October, the stock market sank into a bear market, taking most leading stocks down with it.
As the market eventually shook off that correction and began to launch a new uptrend in January of this year, what was the signal to start buying stocks again? It wasn’t the calendar or some cliche. It was a follow-through day.
Simply put, this bullish signal is a heavy-volume up day that confirms a new rally the market has been making following an extended correction. While not all follow-through days lead to a sustained uptrend, no major bull markets have started without one.
As with most sayings that have stuck around for decades, there is an element of truth to the “Sell in May and go away” maxim. But that’s speculation, not strategy. Stick, instead, to proven rules.
Investing In Stocks: Focus On Market Direction, Stock Charts
Here’s a more sound approach to spotting the best time to buy and sell stocks.
- Check Current Direction Of General Market
Are the major indexes in a strong uptrend, clear downtrend or just muddling along with no clear sense of direction? Find out by checking The Big Picture to see which of three possible stages the stock market is currently in.
Knowing what environment you’re operating in and basing your investing decisions on that is a much better strategy than relying on a random date on the calendar.
- Check Chart Action For Stocks You Own
As IBD founder William J. O’Neil has said, “Trade your stock first. The market second.”
In other words, always keep the overall market action in mind when deciding whether to buy, sell or hold. But ultimately that decision comes down to how your own stock is performing.
Is it flashing clear sell signals? Or is it finding support or showing resilience in the face of overall market weakness? That’s what matters most — regardless of what month we happen to be in at any given time.
Stay Flexible And Focused On Rules, Not Market Maxims
Just like a broken clock is right twice a day, market maxims like “Sell in May and go away” can prove prescient in some cases. But they can also be dead wrong.
So to keep the odds of success in your favor, stick to a sound game plan based on what the market and leading stocks are actually doing, not on what any pundits or proverbs say they “should” or “will” do.
YOU MAY ALSO LIKE: