New market thoughts from Raymond James’ Jeff Saut: “May Day” 05/03/18

“Sell in May and go away – is a well-known trading adage that warns investors to sell their stock holdings in May to avoid a seasonal decline in equity markets.” . . . Investopedia
Growing up with a father who was a stock guy meant that I heard about stocks, and investing, since I was about 8 years old. That means I have been schooled in the stock market for some 61 years. Professionally I have been in this business for over 47 years, which makes me pretty old. In fact, I recently had one investor say, “If you have been in this business for that long it make you 100 years old!” Of course over the years I have heard most of the old stock market “saws” that have been coined over the past few hundred years. One of the most famous market axioms is “Sell in May and go away.” The apothegm suggests that we have now entered the worst six months of the year for investors. Bespoke Investment Group writes about the math behind the axiom like this:
“It’s that time of year again when the phrase “Sell in May” starts to trend. While just about everyone knows of the seasonal market pattern for equities to do relatively poorly in the six-month window from May through October, the actual numbers are always worth highlighting. The chart [to the right] shows the cumulative return of $100 invested in the S&P 500 going back to 1945 and then broken out by the six-month windows of October through April and May through November. If you had simply invested $100 in the S&P 500 at the beginning of 1945, not including dividends, that original investment would be worth nearly $18,000 today. If you had only invested that $100 in the S&P 500 during the months of November through April, that investment would be worth a bit over $8,100 today. Finally, if you only had the money invested in the period from May through October, your $100 would be worth just $220 today.”
Yet, “Sell in May and go away” has not worked in recent years. Indeed, in 2017 following that strategy would have reduced that year’s gains by 11.6%! As Mark Hubert wrote in MarketWatch last year:
“This pattern’s historical track record can be traced to only a few years, specifically, the third year of the presidential four-year term. During the other three years of the four-year term, in contrast, the pattern is statistically non-existent.”
Hulbert traced this pattern back to 1896 and came to the aforementioned conclusion. In fact, “Sell in May and go away” has not worked in five of the last six years.
So, the three month consolidation since the “internal energy” peak of late-January has left the S&P 500 (SPX/2635.67) working its way into the apex of the wedge chart pattern often referred to in these missives (Chart 2). A breakout is coming and we think it is coming on the upside. Moreover, there is a decent charge of “internal energy” available that if a breakout occurs it could be surprising on the upside. I am writing, and recording this on the TIPs Line late Wednesday night because I will be on an airplane headed to NYC to see PMs and do some TV/print media.

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