Investors usually ‘sell in May and go away.’ Why that may not work this year
“Sell in May and go away?” Some market participants say it could be better to wait and see this year. The old stock market adage speaks to the phenomenon in which the May-through-October stretch has seasonally borne out to be the worst six-month period of returns for stocks. With traders leaving their desks during the summer months to go on vacation, the drop in liquidity and rise in volatility contribute to the likelihood of sharper drawdowns. But that maxim may not hold up this year. “Is this the year to not sell in May and go away?” said Jeffrey Hirsch, editor in chief of the Stock Trader’s Almanac. “Let’s track and see what the market does.” There are reasons to believe the next move is higher. The S & P 500 and Nasdaq Composite have hit all-time highs even amid ongoing disruptions in the Middle East, a display of the stock market’s continued resiliency — especially as breadth improves below the surface. .SPX .IXIC YTD mountain SPX and Nasdaq year to date The technical setup remains positive as well. One indicator favored by Hirsch called the Moving Average Convergence Divergence, or MACD, shows the relationship between the 12-period and 26-period exponential moving averages. It’s supposed to show specific entry and exit points in the market, and it suggests there’s still momentum in the current rally. But there are warning signs to be mindful of, especially in the economic outlook. The last GDP forecast from the Atlanta Fed showed first-quarter U.S. GDP growth of 1.2%, a drop from earlier projections above 3%. There also remain fears that AI disruption in the labor market are yet to be fully appreciated. Ultimately, the key factor determining where the market goes next rests on the outcome of the Iran war. A reopening of the Strait of Hormuz, as well as a more durable peace deal, could instill confidence in investors wary of a weakening economy as prices rise. A CNBC survey found that American consumers are already pulling back their spending as gas spikes above $4 a gallon at the pump. “If we get a resolution, something more lasting out of the Iran situation, then [the] market’s probably going to go higher” between May and October, Hirsch said. “If things drag on, and we get ourselves a negative crossover in our MACD signal, we may just as well take a few chips off the table and tighten up a little bit.” Reposition The historical pattern in the six month period from May through October has been poor, but especially so during midterm election years. In data going back to 1945, the S & P 500 rose just 2% from the May through October period, while gaining 7% in the subsequent six-month period, as pointed out by CFRA’s Sam Stovall. During midterm election years, the broader index fell 1.2% on average from May through October. But Hirsch is not the only market participant to say this year could be an exception. Paul Ciana, chief market technician at Bank of America Securities, said this year will also “debunk” the “Sell in May” theory, following a review of the six-, three- and one-month average trends that show that traders should buy in May and sell in July/August, before what he anticipates as weakness in August through October. In the meantime, Hirsh said he is repositioning into shorter-term cash and bond instruments. He likes the iShares 0-3 Month Treasury Bond ETF (SGOV) , the iShares Trust iShares 0-1 Year Treasury Bond ETF (SHV) , as well as the iShares Core U.S. Aggregate Bond ET (AGG) . Utilities is another sector he said he prefers. “Not necessarily go away,” he said, “But reposition.”
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