Attention traders: Here comes May
- Major stock-market seasonal pattern has shifted over the years
- Is the market’s record pace so far this year setting it up for a sell-off?
With “Sell in May and go away” on the horizon, bulls getting nervous that a turbo-charged market could be overbought may want to consult the S&P 500’s (SPX) evolving seasonal patterns.
Although it can’t be repeated often enough that no trend lasts forever, the history books suggest bears may be overestimating the likelihood of a steep stock-market sell-off in the coming weeks.
First, yes, the US stock market has, over the past six decades, chalked up the majority of its gains in the seven months from October to April. So, the advice goes, get out of Dodge before May rolls around, sit out the market’s weakest period (May–September), and get back in the game in early fall.
Sound too simple? Consider the fates of two hypothetical $1,000 investments in the S&P 500 (SPX), from January 1959 to September 2018: One was always in the market (buy-and-hold) and the other exited the market on the last trading day of April and got back in on the last trading day of September. Here’s how things stacked up:
●Ending value of sell-in-May investment: $58,552
●Ending value of buy-and-hold: $52,780
Sell-in-May gained 11% more than buy-and-hold—that’s not insignificant, especially given the simplicity of the approach. And although these results don’t reflect dividends or commissions (which would have tightened the gap), the seasonal strategy clearly did a better job of capturing the SPX’s price appreciation over time. So, it may seem like a slam-dunk decision for investors, as well as an invitation for traders to think about using more short-side strategies after May rolls around.
Strong January–Aprils have, on average, been followed by stronger-than-average Mays.
And given the market’s record-setting pace this year, a prudent trader could argue a downturn would be in the cards, regardless of where we were on the calendar. Wouldn’t it be “classic” behavior for the market to begin one as May arrived?
That’s a perfectly logical argument, except for one detail: Since 1990, May has been a solidly bullish month for the SPX. While from 1960–1989 the SPX’s average May return was -0.7%, from 1990 through last year, that number had flipped to +1.1%, and May also boasted the third-highest winning percentage (71.5%) of any month.
And that’s why an investor who hung around in May and instead waited until June to exit the market (blue line in chart below) would have ended up with $65,094—11% more than the sell-in-May investor (green line) and 23% more than the buy-and-holder (white line):
Source: Power E*TRADE (data)
And what about the supposed threat posed by the exceptionally strong rally this year? As of Wednesday, the SPX was up around 17% YTD—that’s huge. The SPX could fall as low as 2,758 by April 30 and it still would be one of only 16 times since 1959 that the index has gained 10% or more in the first four months of the year.
Overbought, you say? Possibly. But strong starts to the year have more often signaled future strength than they have imminent collapse. The following chart compares the SPX’s returns for May (left) and May–December (right) when the January–April return was less than 10% (blue bars) vs. 10% or larger (green bars). Contrary to what we may expect, strong January–Aprils have, on average, been followed by stronger-than-average Mays—and stronger-than-average May–Decembers.1
Source: Power E*TRADE (data)
Bottom line, although there’s no telling what will happen next month or for the remainder of the year, the SPX’s history doesn’t give any reason for traders to believe the market’s recent bullishness will soon give way to a similar magnitude of bearishness.
The market will always have its down swings, but in light of the tendencies outlined here, some traders will likely be looking at them as buying opportunities rather than the beginnings of downtrends.
Today’s numbers (all times ET): GDP (8:30 a.m.), Consumer Sentiment (10 a.m.), Baker-Hughes Rig Count (1 p.m.).
Today’s earnings include: Archer-Daniels (ADM), Chevron (CVX), Colgate-Palmolive (CL), Exxon Mobil (XOM), Sony (SNE).
1 Supporting document available upon request.