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The November to May Seasonal Trading Strategy


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Understanding The November to May Seasonal Trading Strategy

November to May Seasonal Trading StrategyThe flip side of the “sell in May and go away” stock market trading pattern is the November to May seasonal trading strategy. While May to October is traditionally a weaker time of the year for stocks, the months of November to May tend to put up some of the biggest gains for stocks. There are a number of reasons why stocks tend to outperform from the late fall to the middle of spring. Stock market traders and investors can put this seasonal stock market strength to work for them to increase their trading and investing returns by increasing their exposure to stocks during this seasonally

Of course the November to May seasonal trading strategy does not work every year. It is just a statistical reality that when many years of data are analyzed the November to May time-frame has higher stock market returns than the May to October time-frame. If you want to have exposure to stocks to participate in the annual gains that stocks normally make, the November to May time period is the best time to have maximum exposure to stocks.

There are a number of reasons for the seasonal strength in stocks from late in the year until the middle of the following spring. New revenue and earnings guidance for the upcoming year come out during the third quarter earnings season, which is centered around November. If the earnings guidance is strong from corporate American, stocks react by moving higher in anticipation of stronger earnings in the following year. Stock analysts plug the higher earnings estimates into their models, which causes them to increase their bullish stance on stocks that appear ready to outperform. Another factor is the tendency for fund managers to chase the market during the last two months of the year to bolster their year-end performance.   After the new-year, buying pressure on stocks continues as a surge of new money enters the stock market from year-end bonuses and investors making annual contributions to retirement accounts.   As the new year progresses, fourth quarter earnings from the prior year and first quarter earnings from the new year often provide the stock market a boost, as they demonstrate progress towards higher earnings and stock valuations.
Seasonal Trading Strategy

By May, the seasonal surge in stocks typically runs out of steam, as traders look to book profits and take a break from the stock market, which is known as “sell in May and go away.” This is the time to lighten up on increased stock exposure that was taken during the previous fall. Although stocks can continue higher from May to October and keeping a portion of an investment portfolio in the stock market makes sense, the late spring to early fall tend to be more volatile and dangerous times to hold stocks, as the outlook for the coming year is unclear and the stock market is prone to selling off due to geopolitical events. For those wishing to implement the November to May seasonal trading strategy, lightening up in May and putting money into more conservative interest bearing investments until October will ensure that money is available to invest in the stock market, if weakness develops in the early fall.

How To Implement The November to May Seasonal Trading Strategy

Trading StrategyWhat is the best way to implement the November to May seasonal trading strategy? The answer to that question will vary, depending upon one’s trading or investing outlook and their tolerance for risk.

If a trader or investor is aggressive, then they can overweight their stock exposure during the month of October, if any weakness in the stock market develops. To be truly aggressive, a trader or investor can buy highly volatile momentum stocks that move higher faster than the overall stock market, in anticipation that momentum stocks will outperform the broader stock market.

If a trader or investor is more conservative in their approach, a lesser percentage of their investment portfolio should be dedicated to stocks during the traditionally strong months of November to May. To spread the risk among numerous stocks, a trader or investor that leans towards playing the market conservatively can gain exposure to the stock market by buying Exchange Traded Funds (ETFs) that track stock market indexes. To gain exposure to the biggest market cap technology stocks that trade on the NASDAQ, buying the NASDAQ 100 tracking ETF (NASDAQ: QQQ) provides a way to provide exposure to the hot technology sector.   To gain more broadly-based exposure to the stock market, SPDR S&P 500 ETF (NYSE: SPY) can be purchased to track the S&P 500 index.

The way to trade the November to May seasonal trading strategy is to buy stocks during any weakness that develops during the early fall in the month of October. You then hold stocks through the end of the year and into the new year, until the months of April and May, at which point you lighten up on stock holdings to lessen exposure to stocks during the traditionally weak May to October time-frame.

Be Cautious Regarding The November to May Seasonal Trading Strategy

The November to May seasonal trading strategy is not a sure thing.   It can be trumped by macro forces that affect the stock market. For example, the financial and stock market meltdown during late 2008 and early 2009 caused the November to May seasonal trading strategy to fail during that time-frame. This strategy, as with most seasonal stock trading strategies, requires normal economic and stock market conditions to prevail. Which means the November to May seasonal trading strategy should be utilized when the economy is growing and the stock market is trading based on expected economic growth.

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