SELL IN MAY AND GO AWAY?
Of all the aphorisms used on Wall Street, one of the most famous and used with affection is “Sell in May and go away." It's not from the standpoint that all traders wish for the market to go down (as the phrase implies); but rather when that maxim rolls around the trading floor, it reminds us that we are on the cusp of warmer weather and all of the fun outdoor activities that come with that (except for this week in New York where the weather has been cold and dreary).
Anyway, if you search for “Sell in May and go away” you will find no shortage of articles and papers that attempt to explain why this is, or isn’t, a sound investment strategy. Regardless of the studies, there is a real trading reason why this adage has been adopted: Because for unknown reasons, the 6 month period from May to November—on average—tends to be weaker than the other 6 month period.
Whether it comes down to seasonality, a shortage of liquidity due to trader vacations, or tumultuous global events that can happen over the summer months, the markets tend to ebb as we enter the summer months and have a corresponding uptick in volatility. Of course, it doesn’t always turn out that way, but I am person who likes to deal in historical averages—while contemplating what is happening in real time—to assess market direction. Given that historical perspective, I am at least cautious every year when May 1st rolls around.
History definitely rhymes
Let’s look at the most recent "sell in May and go away" period from 2015. If you had sold on May 1, you would have missed the all-time high of 2134.72 on the S&P 500 that occurred on May 20, but by August 24, you would have looked like a genius when the index hit the yearly low at 1867.01. However, by the time the market closed on October 30, it had nearly made up all of the ground that it had lost during the August sell off. The SPX opened on May 1at 2087.38 and closed on October 30(a Friday) at 2079.36. If we factor in transaction costs, "the "sell in May and go away" strategy would have been neutral last year, but at least it would have saved someone from a stomach churning 11% round trip in the market!
Here is a list of reasons why someone may contemplate getting out of the market this May and wait around for calmer times to come in November:
Seasonal – These factors are ever-present, and this period is one of the weakest for the markets. Since 1958, the strongest week for the market in the second quarter just recently finished. That is the third week in April. From that point, the markets tend to ebb into the summer even if May does provide a short pop—like it did last year.
Technical – Most of my technician friends have grown increasingly cautious over the last few weeks and for good reason: The charts do not look great. The one that has caught my attention recently is the hourly chart on the S&P 500 with the 50- and 200-day moving averages. Yesterday, the 50 crossed back below the 200. The last two times that occurred in the last year, the S&P 500 contracted 10.8% (August 2015) and 12.2% (December 2015 to January 2016).
Asset flows – Since the beginning of the year, equity funds have incurred a net $60B outflow. While some of that abated in April, it has picked up speed again this past week as the major equity ETFs on the broader market and a few key sectors like tech, financials, and healthcare experience outflows. The sector that saw an increase was utilities, which is clearly defensive.
Earnings and economics – First-quarter earnings were pathetic (despite a lot of "beats" against lowered Wall Street estimates), and the economic data points have been disappointing lately on an absolute basis as well as against expectations. Valuation and global growth concerns continue to haunt the market.
Political uncertainty both here and abroad – Our presidential politics are crazy enough, but throw in the Brexit referendum, and now we have a market-disrupting storm brewing that few will model out accurately. By the middle of November, the market will have digested both of these unknowns.
Naturally, no one can perfectly predict the market, but utilizing seasonal experiences, combined with consistent technical and fundamental tools, can help prepare one for the market action to come. Like most things in our world, patterns in the market repeat themselves and provide a template to aid in analysis.
Sell in May and go away this year? Given where the market is positioned and all that it will be dealing with in the coming weeks, that may be the wise choice this year.