This Gives a Whole New Meaning to “Sell in May and Go Away”

Dear Outsider,

An interesting trade came across my desk yesterday.

My colleague showed me how he’s profiting from all the volatility going on this week.

I’ll share that with you if you stick with me.

And I’ll spare you too much of the Fed talk since you’re probably getting it from every angle of Google’s algorithm right now.

But it’s important to remember a few key points about the implications of rate hikes.

At the end of March, I wrote that the U.S. economy is at a tipping point:

The Fed announced it plans to keep raising interest rates throughout the year, with policymakers predicting the benchmark rate (the rate at which banks borrow from and lend to each other overnight) will hit 1.9%. Experts believe this is a conservative estimate, and investors are paying close attention because it affects nearly every sector of the economy, from stocks and bonds to housing and education costs.

But raising rates too much too fast can easily lead to a recession, much like the U.S. experienced in the 1980s when rising oil prices, government overspending, and rising wages led to out-of-control inflation of 13.5%. To tackle inflation, the Fed kept raising rates until they hit 21% in 1981. But this caused the demand for new money to dry up, which in turn killed the housing market, business investment, and economic growth.

We’re seeing eerily similar signs today, but with the added pressure of student loans. And when rates rise even further, borrowers won’t be able to afford their mortgages or other loans...

And in my premium trading service, I noted that overreactions abound. The weak hands are now getting shaken out of the market, and patient investors are buying the dip.

It doesn't quite add up that just because the Fed raised interest rates a half percentage point, the market suddenly imploded, as this should have been well-baked into prices already.

So what’s really going on here?

And can we eke out any profits in the chaos?

Sell in May and Go Away

Sure, some investors are falling for the old trope “Sell in May and go away.”

It doesn't seem like the worst idea at the moment...

Historically, November through April is the best-performing part of the year for stocks. Some speculate it’s because investors get their tax refunds and spend them on stocks.

But remember that this strategy has been debunked many times, as simply buying and holding and reinvesting dividends produces greater returns over the long run than selling in May and buying back into the market at the start of November.

One thing that’s been particularly concerning to me recently is seeing stocks retreat to March 2020 levels, when COVID-19 was officially declared a pandemic and everyone panic-sold.

So what it really means is that stocks were already overvalued going into the pandemic and that the run-up we’ve seen over the last two years was purely artificial — it could even indicate a top to the U.S. stock market. A scary thought, indeed.

Even so, time in the market beats timing the market. And the silver lining today is that stocks are nearing bargain-basement prices. If you’ve been following us for any length of time, you know that no matter what happens to the broad indexes, there’s always a bull market somewhere.

The Next Episode

Personally, I love a good market correction because it means you can get into stocks for a lot cheaper. You can also lower your cost average and even open new positions in companies that you wouldn’t have considered before. Afterall, like I said above, we’ve known for years that the market is overvalued.

So instead of selling in May, playing the other side of the market through options trades looks like an attractive strategy right now.

For example, if I were a betting man, I'd bet against Chipotle (NYSE: CMG) because based on my metrics, it's one of the most overvalued companies in the market right now. But if I were to go ahead and buy puts or even short the stock, I'd want to make sure I'm buying the right options and getting the best deal.

That's where I'd turn to our in-house options expert, Sean McClosky.

Last week, he told me about his little-known market reversal strategy that's minting profits in this environment.

Just last year, Sean banked his readers back-to-back gains of more than 1,000% and nearly 600%.

And with current market volatility, he's gearing up to do it again.

For a fresh take on what to do when the market corrects, check out Sean's strategy here.

Stay frosty,

Alexander Boulden
Editor, Outsider Club

After Alexander’s passion for economics and investing drew him to one of the largest financial publishers in the world, where he rubbed elbows with former Chicago Board Options Exchange floor traders, Wall Street hedge fund managers, and International Monetary Fund analysts, he decided to take up the pen and guide others through this new age of investing. Check out his editor's page here.

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