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Why the Sell in May and Go Away Theme Sounds Stronger in 2019
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It’s that time of year again when investors will get to doubt all their holdings and investments when the market has been so strong. Is that overdue recession coming sooner rather than later? Is the stock market way ahead of itself? Is the next correction, or even a crash, around the corner? Those are all the questions that will get asked as May arrives.
The “Sell in May, and Go Away!” theme is obviously nothing new. The theory is that business slows down and the public is more interested in taking vacations over the summer than working harder when there is less upside and fewer people around to even notice. This is also a time where investors expect slower trading days — the so-called summer doldrums.
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There may be some driving forces that are stronger in the 2019 sell in May thesis than in prior years. The China trade issue remains unresolved at this point, Europe is teetering on recession again (with or without Brexit), and global growth remains muted and slumbering. To top that off, the year-to-date gains of 17.5% for the S&P 500 and almost 24% for the Nasdaq-100 have been so impressive that some of us are even hoping for a pullback for an orderly market. Even a 14% gain in the Dow Jones industrials would be more than impressive enough for most investors, but it has lagged due to the more recent performance of Boeing and underperformance from 3M and Caterpillar.
There are several views heading into May of 2019 suggesting that perhaps a sell in May thesis might be merited in 2019. These do not make for a universal consensus at all, and there is always a question around the “when” the saying really means in May. It is also important to keep in mind that there also have been many expectations for a pullback with slower domestic growth in 2019, but neither have really been the case so far.
Canaccord Genuity’s Tony Dwyer believes a stock market correction is looming. The equity strategist is not calling for a major correction, but you can bet that the financial media will play up the negativity and panic the moment the Dow or S&P 500 suffers a large one-day or one-week loss.
Dwyer noted that the four key tactical indicators remain near extreme overbought and optimism levels. The breadth thrust three-month target has been exceeded, and that prior EPS fear has been largely reversed with earnings season. The firm even expects a small positive gain on earnings rather than the prior consensus for a small earnings (per share) drop for the first quarter of 2019. Dwyer noted:
Although our fundamental core thesis remains positive, given a backdrop of low inflation, the dovish Fed pivot, a re-steepening yield curve, slowing but positive growth, better-than-expected EPS, and valuation expansion, the tactical backdrop continues to suggest a minor correction over the near term, with any drawdown limited to less than 5%.
Again, a 5% correction is not the end of the world by a long shot. With gains of 14% to 24% in the three major equity indexes, some of us would handily welcome a 5% correction.
The Stock Trader’s Almanac is also a source of information as May kicks off each year. After all, it has tracked the stock market trends for many years. The almanac shows that the last trading day in April has been rough on the bulls over the past 21 years, with declines more frequent than advances and with all five indexes down the past four years in a row. Large caps also have been shown to have been hit the hardest, and the Dow was down 15 of the past 21 years. Last-minute profit taking before the end of the month has been one possible explanation for this weakness.
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A few days earlier, the almanac addressed the sell in May thesis by asking that “when in May” question. Over the past 21 years, the best time could be early in May. The almanac’s blog noted:
The month has opened well, on average, recently with strength on the first trading day and on the second for the most part. Afterwards, DJIA, S&P 500, NASDAQ, Russell 1000 and Russell 2000 all tend to drift sideways to lower until around May’s eighteenth trading day or so. It is on this day the NASDAQ and Russell 2000 begin to rally to finish the month. Beware though, this late-May rally typically fizzles before it can exceed the highs reached earlier in the month.
And prior to these brief notes, the almanac clarified that a sell in May thesis does not imply that investors should run for the exits. Instead, it suggested that taking some profits and trimming or selling the underperforming stock and ETF positions would be best. Also worth noting is that it is a time for investors to tighten up their stop-loss and limit orders. The almanac even noted that May is a good time to add new positions in sectors that have a demonstrated record of outperforming during the period.
Investopedia further outlined how the sell in May and go away thesis really works by defining it as the six-month period from May through the end of October period that has historically underperformed the market. And similar to the almanac, that updated report for 2019 also shows that some analysts recommend rotation to focus on products (stocks/sectors) that may be less affected by slower seasonal growth, such as technology or health.
Again, finding a few views on the sell in May thesis does not make for a consensus. Many firms have not even yet issued their investment insights and outlooks for May of 2019 or for the summer. Credit Suisse has been positive, and Merrill Lynch’s most recent short-term view has said it’s a bullish trading cycle with plenty of support on dips to favor new highs for the S&P 500.
And for further debate for the sell in May thesis, Barron’s recently wrote that an investor using this thesis only outperformed peers by 0.7% on average over the past 30 years. It further showed that very few market corrections actually start in late April or early May.
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