Buy in May and Keep Buying

by JDH on May 18, 2013

Every year, in May, I trot out the old “Sell in May and Go Away” article.  If you want to write a financial blog, it’s an easy article to write.  Last year I called it Buy in May? Or Bye Bye in May? so I was able to discuss both the buy and the sell side.  This year, it appears, is different.  It would appear that the correct answer is to not sell, but to buy, and keep buying.

As the market continues to make new highs, it would appear that one of two scenarios will occur: up or down.  (That’s why you pay me the big bucks for this in depth analysis……..).

The broad market averages continue to make new highs, thanks no doubt to our government friends who keep printing money.  If you are a saver, what do you do?  There is no point to putting your money in the bank, since you won’t earn any interest.  Your only option is the stock market, so you buy, which drives the markets higher.  It does not appear that there is anything imminently on the horizon to change the market’s direction.

In fact, it is quite conceivable that the pace of increase will pick up speed, and we could be headed for a “blow off top”.  If that’s the case, buy some calls and hang on for the ride.

Of course the opposite is also possible.  The Relative Strength Index on most major averages is already in over-bought territory, so we could be due for a pullback at any time.  If you believe we are in a long term bull market, a brief pullback would be very healthy.  If that happens, we could go from “Buy in May” directly into the summer rally with hardly a pause in between.  That seems inconceivable to me, given the lofty heights that the market has already achieved, but those lofty heights are also inconceivable, so further increases are possible.

Gold

As for gold, the situation “ain’t lookin’ good” in the short term.  Or is it?

Friday’s down-draft brought gold near to the lows of April 16, which could be the retest of those lows.  If the $1,325 level proves to be support, great, gold could recover and be in for a sustained rise.

As with the general markets, the opposite is also true.  A drop to $1,300 probably means that gold will drop into the $1,200 range, or lower, which would be the buying opportunity of the decade.

As previously reported, my strategy had two elements:

First, on May 3 I sold calls against the gold stocks I owned.  I sold May calls, which expired after the close on May 17, for strike prices that were out of the money.  My transactions included selling:

A quick look at the closing prices on Friday shows that all of the stocks closed below the strike prices indicated above, meaning that all of the calls expire worthless.

That’s both good news and bad news.  It’s bad news because my stocks have not increased in value.  It’s good news because at least I was able to pocket some premiums to mitigate my losses.  Long term I believe these shares will increase in value, so since I don’t plan to sell, I don’t care where they trade each day, or each month.  If they are still low two years from now I won’t be happy, but if I keep lowering my cost base with a covered write strategy it may not matter.

The markets in Canada are closed on Monday for our Victoria Day holiday, so on Tuesday or Wednesday I’ll see where the market is at, and if we have a few up days for gold, I’ll probably cover again.

My second strategy to mitigate gold losses was to buy puts on GLD, the big gold ETF.

On May 8 I purchased the July $130 puts for $1.35; on Friday I sold half of them for $4.10 (more than doubling my money).  I still hold half of the original puts, at no cost, as insurance against further gold weakness.

With the Dow closing at 15,354 on Friday, yet another all time high, we could be in for some fun to come.  Blow off top?  Crash? Who knows.

Me? I’ll enjoy the holiday weekend, and think no more about it, until next week.