May is just about over with and the old “sell in May and go away” saying might just be motivating you to sell, but the ProShares UltraShort S&P 500 ETF (NYSEARCA: SDS) might be a better way to protect your portfolio. That’s why we added it to our SmallCap Network Elite Opportunity (SCN EO) portfolio as a hedge against a potential market downturn or rather a short-term trend reversal.
Understanding “Sell in May” and How the ProShares UltraShort S&P 500 ETF Works
To begin with, there is some truth in the “sell in May and go away” saying because the summer months when people go on vacation and there is not too much news to move the markets inevitably means lighter trading and the potential for bigger moves on what news there is. Likewise and for the past three years, the end of Spring has led to sell offs that lasted through the summer or into fall, but the Dow still ended higher at the end of each year.
However, the real danger in following the “sell in May and go away” is the following:
- The data to prove the saying is problematic as usually you can usually remove the worst or best months out of a large set of data and you might come up with a different conclusion.
- Some say it does not apply during the last year of a President's term when he's trying to stimulate the economy while others claim it won’t work when central banks are pumping out money – as they have been doing for some time (of course, the last three years proved those who said either to be wrong).
- You will incur trading commissions.
- You will incur taxes and those taxes may be high if you have short-term gains.
- You will forget the last part of the saying which is either to get back in on St. Leger's Day (the second Saturday in September) or Saint Crispin’s Day (October 25th) as the saying is actually British.
Instead of selling, the ProShares UltraShort S&P 500 ETF might be a good solution to put your worries to rest as well as to make some money during any downturn. Specifically, the ProShares UltraShort S&P 500 ETF seeks a return that is -2x the return of an index or other benchmark for a single day as measured from one NAV calculation to the next. In other words and if the market goes down, the ETF should go up by twice and vice versa should the market go up – which it has been doing since the financial crisis. That is why the ProShares UltraShort S&P 500 ETF is down 30.8% since the start of the year, down 42.6% over the past year and down 82.8% over the past five years.
With that said, take a look at this comparison chart for the ProShares UltraShort S&P 500 ETF verses the S&P 500 and the Dow:
Notice what happened during the financial crisis? On the the hand, you sure would not have wanted to stay in once the market bottomed out.
Finally, here is the latest technical chart for SDS:
The Bottom Line. Of course, there is always a catch. If the market continues to go up, the ProShares UltraShort S&P 500 ETF will continue to go down plus its also invested in complex derivative type of instruments which, lets face it, could blow up in everyone’s face. Nevertheless, the ProShares UltraShort S&P 500 ETF is still going to be a better idea than selling in May and going away.
SmallCap Network Elite Opportunity (SCN EO) has an open position in SDS. To find out what other open positions SCN EO currently has, and to learn why so many traders and investors are relying on this premium subscription service, click here to find out more.