Wednesday, May 4, 2011

Sell in May – why?

                Traders buy and sell stocks, bonds, and call options based on trends, charts, historical events and expected events.  Traders also buy and sell on expected unknowns.  They time the market and often times hold a position for less than a minuet.  We do not call these folks buy and hold traders.

                Investors buy earnings and sell at a profit.  Investors do not try to time the market.  We do not buy and sell based on charts, rumors, or hunches.  We buy earnings and sell into our profit.  Why is the old adage “sell in May and go away” significant to us?

                First, may I say that selling in May proves to be right more often than you might think.   This is how clichés get their credibility.  The Christmas season is responsible for a significant amount of revenue for many, not all, but many companies.  That revenue makes it way to earnings and earnings drive stock prices and our dividend payments.  Stock prices are based on a company’s actual results and the expectation of future results.  As we move into late spring, the good earnings are baked in the cake and stock prices tend to be high.  Stock prices reflect the improved earnings.  

                During the next 6 months, late spring through early fall, earnings move up and down, and traders will sell at the high in May and “go away” until they find a point at which they want to re enter the market.

                My strategy is to use our income investors’ investing rules to take advantage of this trend.  I write calls during the beginning of the year.  If my income producing companies perform well, I will get some greatly appreciated additional income from writing covered calls.  Remember we write covered calls for a minimum of 10% gain.  If my income producing companies really perform well, the call buyer will take my stock and I get the gain and the call premium and often times the quarterly dividend as well.   If my income producing company does only okay but still continues to pay me a dividend, the call buyer may not take my stock and I get to keep it.   During the next cycle, I will write covered calls again.

                After May when everyone goes away, keep your stock wish list handy.  Use your profit and accumulated cash to buy one of your stocks when it begins to look more attractive than it did when the stock price was high.  

Very Truly Yours,
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