As we discussed last week, the period between May 1 to August 31 is the weakest season, annually, for stock performance.
Over the last 10 years, the Dow Jones Industrial Average has experienced a median decline of 1.9% over this period, excluding dividends.
Some sectors and individual stocks buck the downtrend. But generally speaking, returns are muted across the market.
This month, I’ve highlighted several high-value stock opportunities in spite of the “Sell in May and Go Away” phenomenon.
But one asset class consistently outperforms stocks during these slow summer months.
And it’s showing all the signs to buy right now…
You’ve Got the Golden Ticket
Knowing that stocks do poorly during the summer, it may be tempting to buy an inverse exchange-traded fund (ETF) that tracks a major index.
You might even consider shorting a market leader that’s poised to plummet harder and faster than the broader market.
But timing an inverse fund buy is notoriously difficult. And shorting stocks can tie up a chunk of capital too hefty for the average investor.
And both strategies can be quite risky if the market moves against you.
Gold, however, represents a low-risk, high-reward play on market weakness through the summer.
Allow me to explain…
Stop, Correlate and Listen
Gold is often revered as a safe haven play when volatility rises in the stock market.
As a result, it enjoys a strong and reliable negative correlation to the Dow Jones.
This means that when the Dow rises, gold typically falls. More importantly, gold often gains when stocks decline.
Furthermore, there are many liquid physically backed gold ETFs that allow investors to trade the metal nimbly, nowadays.
Take for instance the iShares Gold ETF (IAU).
As I mentioned earlier, the Dow has averaged a nearly 2% decline between May 1 to August 31 since 2006.
Well, over the last 10 years, IAU has gained 1.4% on average during the same period.
In fact, over that span of time there were only two years where IAU tracked the Dow during the summer: 2008 and 2015.
And in both cases, IAU still outperformed the index.
In 2008, the Dow fell 11.3% from May to August while the gold fund declined just 2.2%. Last year, the index fell 8.3% during the slump months versus a 3.6% drop for IAU – less than half the Dow’s fall.
Furthermore, on renewed market volatility, IAU has just hit its highest level of negative correlation to the Dow (0.73) since late January on a rolling 20-day basis.
This makes IAU an effective hedge against a major market drop.
Make Friends With the New Trend
The most compelling argument for exploiting the gold fund for a hedge lies in its trend.
You see, IAU has just broken out of its four-year downtrend and right into a new bull market.
From its October 2012 high to its December 2015 low, shares declined 42%.
But the fund has ripped since then, gaining 23% from the low to its April high.
And while shares have cooled off a bit, they are well supported along their 50-day moving average, which presents an attractive entry point.
Best off all, IAU could soar even higher closer to next month’s Federal Open Market Committee meeting.
If the Federal Reserve does raise rates next month, the dollar will undoubtedly rise and stocks will likely fall.
Gold will be kept afloat by increased demand for safety amid volatility.
If the central bank elects not to hike rates, then gold will continue to rally as the dollar weakens further.
No matter what the outcome, it’s practically a win-win scenario – so long as you’ve invested in IAU.
The bottom line? Forget about shorting stocks ahead of their summer slump. Look no further than the strength of gold to hedge your portfolio, now, before things really get dicey later this year.
On the hunt,