Sell in May go away?

Is it really worth following this Wall Street rule of closing positions and doing nothing? Can we find out from the performance of the Securegate fund?

You’ve probably heard the saying “Sell in May and go away.” But how did this rule originate, and does it make sense to follow it?

Historical statistical data shows that stock markets tend to have lower returns from May to October compared to the period from November to April. This could be due to various factors, such as lower trading volumes in the summer months, seasonal investor behavior, or macroeconomic cycles.

I’m not sure if investors still use this strategy, but it’s clear that historical patterns don’t necessarily predict future performance. Additionally, transaction costs, tax liabilities, and potential tax exemptions based on holding periods can all affect the overall profitability of this strategy.

Some analyses claim that, in the long term, staying in the market has yielded higher returns than being out of the market and missing days with significant gains. Others argue that major up days are often followed by significant corrections, and that market cycles timing can lead to higher returns than simply holding stocks long-term.

In any case, for me, where options writing is the foundation of my trading, lower trading volumes and a sideways, boring market are the best possible scenarios.

I already have open positions for October and November, where I was able to find excellent trades, with stocks offering higher volatility, higher premiums, and safe distances from the current price. I plan to take advantage of the summer months for the time decay component of the option price. For this type of trade, lower trading volumes and time are our friends. We’ll patiently sit on these positions, and as expiration approaches, our positions will increase in value if the market moves sideways, up, or down at a safe distance from our positions.

Notice that the market can move conservatively in any direction, and we will still capture maximum profits. Compare this strategy to holding stocks - you need the market to move in your favor. A sideways trend or a move against you offers no substantial profit or may even result in a loss.

Securegate fund performance January - June

First, let’s take a look at what has been happening in the market:

• Contrary to expectations of a triple rate cut in the U.S., the Fed has not made any adjustments to interest rates so far. Instead, it is waiting for data that will convince it that the economy is heading toward declining inflation and that this trend is stable. However, the market seems unfazed by this and remains calm, even optimistic.

• The VIX volatility index has been at low levels for an extended period, which naturally correlates with the calm in the market. Yields on bonds are slowly declining, and all of this together is leading to rising stock prices.

• The stock market is clearly being driven upward by technology stocks, especially anything related to the demand for AI infrastructure. Among the “Magnificent Seven,” only TSLA is lagging, while the rest have seen impressive gains, new all-time highs, high valuations, and heaps of cash that they are sitting on. It will certainly be interesting to see where they decide to allocate this cash.

• The S&P 500 is also elevated thanks to the strength of the tech sector. Small and mid-sized companies have struggled to keep up with the pace of large tech firms in the first half of the year, and some investors are beginning to shift towards these smaller companies in anticipation of a possible correction in the top tech firms. Whether a significant correction will occur is, of course, unknown. The demand for AI is enormous, NVIDIA and its suppliers can essentially dictate prices. The fact that they currently have no real competition is evidenced by the enormous margins they can still afford. Thus, high demand is not waning, and revenues and profits could continue to hold steady for several quarters, if not years. It will depend on the willingness and confidence of investors in the continued growth of tech companies.

market and fund performance comparison:

In the first 6 months of this year, the S&P 500 gained 13.07%, while the Securegate I fund achieved 23.58%, outperforming the market by approximately 80%.

If we compare these values with the same period last year, the S&P 500 gained 15.25%, while the fund achieved nearly 19%. In the second half of 2023, the S&P 500 was essentially at half the performance of the first half, while the fund was even slightly more effective in the second half compared to the first half.

Looking at the performance over the last 12 months, from July 2023 to the end of June 2024, the S&P 500 stands at +21.58%, while the fund is at +45.83%.

I provide all the figures below in a table for easy comparison. Notice that, unlike the stock market, my strategy is very consistent in both typical market growth and corrections.

S&P and Securegate I compare

	1-6 2023	7-12 2023	1-6 2024	12M
S&P	15,26%	7,67%	13,97%	21,58%
SG I	18,85%	22,24%	23,58%	45,83%

Legislation changes (valid for Czech rep only)

As of July 1st, an amendment to the Investment Funds Act, including adjustments for alternative funds, comes into effect.

Key obligations for managers of alternative funds:

1. The manager of an alternative fund will now be required to include in their name that they are a venture capital entity;

   
   

2. The manager of an alternative fund will no longer be allowed to include the word “fund,” its translations, or any derivatives thereof in their name;

   
   

3. The manager of an alternative fund will now be allowed to collect assets only from investors who invest at least 125,000 EUR, and additionally from a maximum of 20 individuals who do not meet this minimum investment;

   
   

4. The manager of an alternative fund must submit an annual auditor’s report to the Czech National Bank (ČNB) verifying compliance with the investor limit if assets are collected from more than 20 investors;

   
   

5. The manager of an alternative fund now has a new structured pre-contractual information obligation towards investors and is further required to assess the suitability of the investment for the investor based on their financial background, investment objectives, and professional knowledge and experience in investments (which they will be obliged to obtain from clients).