A Trade To Make During The Summer Doldrums

While the old Wall Street idiom "Sell in May and go away" is not without some merit, it's actually June, at least on a historical basis, that can bring more downside for equities, perhaps giving traders the opportunity to profit on the downside during the often sluggish summer months.

While there are always seasonal trades to be had, historical data suggest the S&P 500 often struggles in June, July and August. 

Returns on a year-over-year per month basis show the S&P 500 falling a third of a percent in June before rising in July only to fall again in August, according to Direxion, one of the largest issuers of inverse and leveraged ETFs. The S&P 500's average annual summer performance is a loss of 0.12 percent compared to a gain of 0.64 percent during the rest of the year, according to Direxion.

Leveraged ETFs are not meant to be held for more than a day, but the summer doldrums could present aggressive traders opportunity with the Direxion Daily S&P 500 Bear 3X Shares SPXS. As its name implies, SPXS attempts to deliver triple the daily inverse performance of the S&P 500. SPXS has a bullish counterpart, the Direxion Daily S&P 500 Bull 3X Shares SPXL.

“So historically it may have made sense to sell the S&P 500 in May,” said Direxion in a recent note. “Returns on a YoY basis have been negative on average for June-August.  In contrast, the returns for the full-year monthly numbers have been 0.64%.  It may not sound like a lot, but it is the difference in the market on average being up ~7.5% in a year and being down.  So if you believe in the past as prologue, you could trade SPXS (Daily S&P 500 Bear 3X Shares).  But if you think that regulatory relief and the anticipation of lower taxes will drive markets higher, SPXL (Daily S&P 500 Bull 3X Shares) could be for you.”

Some traders appear to be prepping for a summer slump for U.S. stocks. For the 30-day period ended June 8^th, outflows from SPXL averaged more than $1.5 million per day. Conversely, SPXS averaged daily inflows of nearly $223,000 over the same period, according to Direxion data.