A "Sell In May & Go Away" Follow-Up

JC Parets
August 18, 2018

From the desk of Tom Bruni @BruniCharting

On May 1st we spoke about seasonality and why the traditional "Sell In May and Go Away talk is a great headline, but not a great investment strategy this year. While most think that seasonality data is useful to position ahead of what are typically weak or strong periods, we find that the real signal occurs when the market does not adhere to its historical patterns. Now that we're a bit more than half way through the seasonally weak May-October period, we thought it'd be helpful to look at the market's performance thus far and see what it could possibly mean for the rest of the year.

Below is a list of the US Market sectors and sub-sectors we track and their performance since April 30th. For the purposes of this exercise I added the Nasdaq 100, Russell 2000, S&P 500, and Dow Jones Industrial Average to provide a general sense of the broader market's performance.

Click on table to enlarge view.

As we can see, all of the major indexes are positive so far during this period, and not marginally positive either. The Nasdaq 100 is up nearly 12%, Small-Caps are up 9.3%, the S&P 500 is up 7.4%, and the Dow is up about 6%. Not only are the indexes fairing well, but the average component on this list is up 2.35% and the median is up 4.75%. This is supposed to be a seasonally weak period of the year, but so far buyers remain in control.

Stat master Ryan Detrick of LPL Financial is seeing a similar situation and was on CNBC last week to discuss his take on the "Sell In May and Go Away" narrative.  Ryan notes in his discussion that the S&P 500 is up 8% since the start of May, but it's also been up in April, May, June, and July. Since the 1950s there were 10 instances where those four months were all positive, and in all 10 instances the market was higher in the final 5 months of the year by an average of 9.5%. His takeaway from this study is that since "Sell In May and Go Away" isn't working thus far, the market might be telling us that the bulls may be in charge here for the rest of the year.

In addition to this, we're also in a mid-term election year. As you can see from the headlines below, seasonal data suggests that stocks tend to struggle leading up to the mid-term elections in November, and then strengthen following that period. We've not seen this play out yet either, so could it be that the pain trade really is higher and that continued strength in US Equities would actually fool the majority and lead to a "chase higher" into year end?

The Bottom Line: Seasonality and sentiment are just two parts of our "weight of the evidence" approach, but they can be very important when at extremes. While we're only halfway through the May-November period, the resilience of the US Stock Market in the face of weak seasonality, trade wars, the Emerging Market selloff, and many other potentially bearish data points being pointed to suggests that there may be larger forces at work here. While this is not an "all clear" to go out and buy stocks blindly, it is certainly one of factors that is supportive of the bullish US Equities thesis we've been discussing all year.

Thanks for reading and let us know what you think!

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Allstarcharts Team

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