Sell in May?

It’s that time of year folks. When the “Sell in May” statisticians provide the historically compelling numbers to make the case for being out of the stock market for the next 6 months. If you are not aware, the odds are heavily stacked against you if you do. Or are they? Much of the evidence is due to the fact almost all of the nasty bear market declines (’29, ’87, ’00 and ’08) began during this period. But the facts are the facts. On que, Dana Lyons posted an obligatory but non-confirming article that looked at the data in a different light and dug a little deeper than the raw numbers. Because of what he found and the fact it is contrarian, I thought it worthy of passing along…

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There is some evidence to suggest that stock investors would be well served by NOT selling in May and going away this year.

One of the most famous of all of Wall Street’s trading bromides is “Sell In May & Go Away”. Of course, the saying refers to the tendency of stocks to perform worse during the 6 months from May through October than they do from November through April. Perhaps the reason why it is still so popular is that, unlike some of Wall Street’s other sayings, there is actually solid historical evidence to back it up, including recent history.

Specifically, here are the average returns in the Dow Jones Industrial Average during the 2 periods since 1900:

November-April: +5.45%

May-October: +1.61%

Not only does the average return for the May-October period lag badly, but the consistency of positive returns has been much less reliable:

November-April: 69% Positive Returns

May-October: 61% Positive Returns

Plus, as mentioned, unlike many seasonal tendencies that lose their effectiveness over time as the edge gets arbitraged away, the Sell In May pattern has held true even as of late. For example, 6 of the last 7 years, 10 of the last 12 years and 18 of the last 23 years saw the Dow stronger from November-April than from May-October.

So is there anything that bulls can hang their hat on during the forthcoming 6 months? Well, first of all, despite the fact that May-October has generally lagged its 6-month counterpart, the historical average return for the period is still positive. So it’s not like the whole period has been a disaster, though there have certainly been some of those.

In parsing the data, however, we have found one historical trend that may actually encourage traders to stay invested during this year’s May-October period, rather than the mere expectation that their investments will just be biding their time. It is based on the performance of the just completed November-April period – specifically, the Dow’s strong (but not too strong) +15.4% performance.

Here’s what we mean. We again went back to 1900 and measured the return in the Dow during every November-April period. We then broke the returns down by those less than -15%, those greater than 20% and all 5% intervals in between. We then looked at the subsequent May-October periods to see if there was any correlation.

As it turns out, negative November-April returns had a strong tendency to lead to negative May-October returns (except for the very worst years which typically saw mean reversion). Conversely, positive November-April returns had a strong tendency to lead to positive May-October returns. And the historical sweet spot for May-October periods came following November-April returns ranging between 15%-20%, e.g., this year.

As the chart reveals, following the 13 November-April periods with returns between 15%-20%, the average May-October return has been +9.64%. That, again, compares with an average return during all May-October periods of just 1.61%. Furthermore, 11 of the 13 years saw positive returns from May through October.

Now, there are no guarantees in financial markets. As recently as 2011 saw this tendency fail when the Dow lost 6.7% during the May-October period (with a drawdown that was much worse) following a November-April period that gained more than 15%. Furthermore, who’s to say these returns aren’t just completely random anyway?

We will say that this seasonal tendency is far down on the list of decision-makers for us as it pertains to these upcoming 6 months. We have our models and indicators that we track which, as always, will guide our investment posture. That said, given the negative ink paid toward the “Sell In May” period (and deservedly so), at least this is some evidence to suggest that, for this year, stocks could instead Excel In May

April 2017 Charts on the Move Video

The US markets spent most of April consolidating the prior months gains. The SP500 and Down sit just under prior resistance awaiting a catalyst to push higher. Now that we are entering the weak summer seasonal pattern (Sell in May and go away!), does it put a damper on rising stock prices and or will they buck the trend?  My latest Charts on the Move video is available for viewing at the link below. 

https://youtu.be/3hGtMVGu0PA

A Retest or Bear Trap?

The 10 year Treasury bond yield found a bottom last July and rose almost 100% in 5 short months. Since topping and forming negative momentum divergence in mid-December, the yield chopped around in a sideways consolidation until mid-April where the 2.34% critical support eventually level failed. 

As we know, frequently when price (in this case yield) breaks below a critical support level, it will often back-test that same level immediately after the break. If that back-test holds, it will typically give the bulls a chance to exit their positions and then see the bears take complete control pushing it lower. Of course, nothing is that easy otherwise we would all be gazillionaires. In addition, there are times when the back-test slices right through the support line like it wasn’t there and climbs higher. This is a classic “bear trap” as investors who shorted at the breakdown are now holding a losing trade (“trapped short”).

As you can see, yields are currently back-testing the underside of critical support as it sits within a cats whisker of it. I pointed out the break down in a past blog post and called an “all clear” to get back into bonds expecting the market to normalize rates lower. We are within a week or less before we find out whether the market is going to prove me wrong and trap yield bear or reverse course and restart the fall in rates (or increase in bond prices since they move inversely)

Change

It is not necessary to change. Survival is not mandatory. ~W. Edwards Deming

The pessimist complains about the wind; the optimist expects it to change; the realist adjusts the sails. - William Arthur Ward
 

While one could quarrel with whether Amazon is a technology company or a retailer, it would be very difficult to argue the investment world has not dramatically changed.

An All Clear (intermediate term) Signal for Bonds?

The US 30 year long bond peaked in July of last year and the combination of FED threats of multiple (4) interest rate increases and the Trump pro-growth election agenda had the effect of a proverbial “rug pull” out from under US bond prices. In 9 months the T-bond lost 17% (a huge amount for a so called “safe” investment) and shocked many investors as losses piled up.

It seems like political reality has finally set in, and the expectations for a FED rate increase next month is now down to just above 4%. Combine that with the fact that smart money (commercial interest) piled into bonds and are now at multi-year highs in their Treasury bond holdings provides all the reasons why we see bond prices bottoming, reversing course and moving higher. Price broke out of a double bottom pattern earlier this week and was precluded by an oversold divergent low, a high probability “buy-me” signal.  The pattern will be confirmed by a hold above the red horizontal breakout level.

If this pattern plays out, it projects to a rally up to the very important support/resistance zone marked T1. Coincidently (and should not come as a surprise) it comes at a time that retail bond investors turned overly bearish (a theme we see repeated over and over in investing – retail investors being on the wrong side of the trade).  As always after a major correction, investors patience will be tested as only time will tell if this reversal goes on to eventually form a lower high or instead on to make new highs. Until that is determined, it appears as if the market is giving the “all clear” signal to be long US T-bonds and because the institutions are buying again, at the same time their appetite for equities is weakening