Should You 'Sell in May and Go Away' This Year?
Will an historically bearish month buck the trend in 2013?
by Ryan Detrick, CMT 4/27/2013 10:52:17 AM
The major market indexes finished the week solidly higher, despite lackluster gross domestic product (GDP) data and even a fake tweet from the Associated Press. While the latest batch of earnings reports were mixed, the good seemed to outweigh the bad, with Wall Street bouncing back from last week's drubbing. Looking ahead, Ryan Detrick, CMT, offers some words of encouragement for the bulls, while Rocky White takes a look at what we might expect for the historically bearish month of May.
- The chart pattern everyone is talking about
- The importance of presidential cycles in May
- Is optimism too high?
Finally, we close with a preview of the major economic and earnings events for the week ahead, plus a featured sector to watch.
Notes from the Trading Desk: Climbing a Wall of Worry
By Ryan Detrick, CMT, Senior Technical Strategist
Todd Salamone is out again, as he is in Las Vegas at the Annual Options Industry Conference. I'll be filling in again this week.
You have to hand it to the bulls. After the S&P 500 Index (SPX - 1,582.24) had its worst week of the year, losing 2.1% two weeks ago, the bulls fought back nicely. As expected, the combo of 1,550 and the SPX's 40-day moving average were solid support.
Also, the CBOE Market Volatility Index (VIX - 13.61) has totally imploded from its recent 50% surge. Todd was all over this one, as he noted previous spikes of 50% have marked peaks in volatility and usually present good buying opportunities for equities. So far, so good.
Sparking last week's rally were positive reactions to earnings. Although overall revenue is still disappointing, the recent batch of earnings was much better than what we saw two weeks ago. The one group that really stood out, though, is housing, as various housing names reported very strong earnings. I've said before that housing is the one area of the economy that will continue to lead, and the recent earnings and guidance from the group look very strong for future overall economic growth.
On the technical front, there's been a lot of chatter regarding a potential head-and-shoulders top forming on the SPX. If you believe this, then the SPX is currently in the process of making a "right shoulder" before an impending big drop.
What we continue to find amazing is how quickly and well-publicized the bearish patterns are versus the bullish patterns. The SPX made a picture-perfect inverse head-and-shoulders pattern the last three months of 2012, yet all we heard then was how bad the "fiscal cliff" was going to be for everyone's portfolio. That pattern played out perfectly and led to the best first quarter since 1998. From an anecdotal point of view, we find this to be very bullish. Think about it: This recent bearish pattern isn't even completed yet, but we have nearly everyone talking about it, whereas bullish patterns get little to no love at all. Markets climb a wall of worry, right?
There are many concerns out there. From small-caps lagging, to bond yields soaring, to "sell in May and go away," to the aforementioned head-and-shoulders pattern, to "light volume is bearish," to weak breadth, to Transports lagging -- the list of concerns is long and worth noting. Now I'll add to it.
Last week, Barron's Big Money Poll had the most bulls in its 20-year existence. Currently, 74% of those polled were bullish over the next six to 12 months. This figure was just 46% six months ago. Of course, over the past six months, the SPX has added more than 10% and moved to new all-time highs, so the logical question is: If this group was bearish and very wrong back in October, what does it mean now?
Also, the action in the National Association of Active Investment Managers (NAAIM) survey is a concern. Active managers have drastically cut their exposure to equities recently, and previous peaks have eventually lead to SPX pullbacks. The pullbacks just took some time after the NAAIM rolled over, as both the February '12 and August '12 peaks in the NAAIM and subsequent rollovers were a few weeks before the SPX peaked and rolled over. Now, with a drastic drop in the NAAIM, one has to wonder if the SPX will be due to play catch-up soon and pull back.
Now for the positives. I see all of the concerns and am not blind to them, but continue to think siding with the bulls is the way to go here. At the very simplest way to look at things, the trend is up until it isn't. So many people have been trying to pick a top since February, and in the end they have probably fueled the rally with their bearish bets.
Now, what about the whole "Sell in May and go away" thing? Well, that has certainly been wise the past three years, as the SPX has peaked the past three Aprils before eventual pullbacks of 17%, 21%, and 11%, respectively. In fact, over the past five years May is the second-worst month, and over the past 10 years it again is one of the weaker months. The big kicker is June, which is by far the worst month.
Here's where things get interesting. During Year 1 of the Presidential cycle, May is actually strong! Going back to 1949, May is up 1.00% on average, and is higher 56% of the time for the Dow Jones Industrial Average (DJIA - 14,712.55). (Be sure to check out what Schaeffer's Senior Quantitative Analyst Rocky White has to say about selling in May on the next page.)
Investors Intelligence recently saw a big surge in the number of participants looking for a correction. Since the '09 lows, when the number gets up to the 35% area, it has actually been a nice buying opportunity more often than not. We are there now, and there's a good chance it could once again show the crowd is too worried at the exact wrong time.
For some quantified data and a longer-term look at this: Going back to 1980, when those looking for a correction gets over 35%, we do see some outperformance going out six months.
Lastly, here's one of my favorite charts, and it is one I've used many times in the past to remain bullish. I've read a lot that breadth is bad, and this suggests the market is due to correct. Well, if you look at the cumulative return of the advance/decline issues at the New York Stock Exchange (NYSE), it once again made a new high. Historically, this suggests there is actually very strong internals, and it's a great sign that the current rally is on firm footing. I simply don't see any reason to get overly bearish when I look at this chart.
There are a lot of good arguments for both the bulls and bears here. Still, the overwhelming evidence continues to suggest higher prices are on the horizon. Be open to anything, and good luck in your trading.
Indicator of the Week: Sell in May
By Rocky White, Senior Quantitative Analyst
Foreword: I'm sure you've read over and over again the catchphrase "sell in May and go away." It refers to the fact that, historically, stocks have underperformed during the six-month period from May through October compared to the six months from November through April. The tables below summarize the returns for the S&P 500 Index (SPX) for the six-month time frames mentioned. Looking over the past 30 years and over the more recent 10 years, the market has, in fact, done way better from November through April. In the analysis below, I'll break down the returns a bit further and see if there's anything to give us hope that the next six months will break this trend.
Next 3 Months: Below is a table breaking down the May-through-October returns into three-month time frames. When you look at the last 30 years, you see the first half of those six months are more bullish than the second half when measured by average returns. That's good news for the shorter term.
However, when you look at the more recent data, the first three months have been pretty poor. Only 30% of them have been positive (including just one of the last seven), averaging a gain just above breakeven.
Another way I broke down those May-through-October returns was by how investor sentiment was aligned heading into that period. I measured sentiment using the Investors Intelligence (II) sentiment survey. Specifically, I took the percentage of those saying they were bullish and subtracted the percentage that was bearish. The larger the difference between the bulls and bears, the higher the amount of optimism from investors. As contrarians, we believe widespread optimism has bearish implications for the market.
Below is a table showing the May-through-October returns depending on whether the II sentiment survey was showing pessimism (left column) or if investors were showing optimism (right column). When the survey was showing the most optimism, that is when the difference between the bulls and bears was greater than 20%. The returns in these instances are quite bearish, with stocks averaging a loss of 1.38%. Unfortunately, the latest poll showed the difference in bulls and bears to be at 24.7%.
Individual Stocks: I don't think the numbers above will help anyone sleep at night. However, while stocks in general have been poor historically over the next six months, there are some individual stocks that have been exceptional. Below are stocks that have been positive at least 80% of the time from May through October since 2004. At the top of the list is Celgene (NASDAQ:CELG), which has actually been positive in every year, averaging about a 15% return over the next six months. Two very popular stocks, Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG), are next on the list. While the market in general will be fighting a poor seasonality trend, these are some of the stocks that actually have seasonality on their side.
This Week's Key Events: The Fed Meeting and Uncle Sam's Payrolls Report
Schaeffer's Editorial Staff
Here is a brief list of some key market events scheduled for the upcoming week. All earnings dates listed below are tentative and subject to change. Please check with each company's respective website for official reporting dates.
Monday
- The week kicks off on Monday with pending home sales, personal income and spending data, and the Dallas Fed's manufacturing survey. Meanwhile, Herbalife (HLF), Buffalo Wild Wings (BWLD), Express Scripts (ESRX), Newmont Mining (NEM), Hartford Financial Services (HIG), Loews Corp (L), Masco (MAS), Riverbed Technology (RVBD), Sohu.com (SOHU), Sturm, Ruger & Company (RGR), and Suncor Energy (SU) are due to report quarterly earnings.
Tuesday
- Tuesday's round-up includes the S&P/Case-Shiller home price index, the employment cost index, the Chicago purchasing managers index (PMI), and the Conference Board's latest consumer confidence report. Also, the Federal Open Market Committee (FOMC) will begin its two-day meeting. Elsewhere, investors will have the chance to digest earnings results from Pfizer (PFE), Sirius XM Radio (SIRI), Questcor Pharmaceuticals (QCOR), Office Depot (ODP), 3D Systems (DDD), Aetna (AET), Archer Daniels Midland (ADM), Avon Products (AVP), BP (BP), Domino's Pizza (DPZ), DreamWorks Animation SKG (DWA), Genworth Financial (GNW), Leap Wireless International (LEAP), Legg Mason (LM), The McGraw-Hill Companies (MHP), MGIC Investment (MTG), SolarWinds (SWI), Sourcefire (FIRE), Starwood Hotels & Resorts Worldwide (HOT), United States Steel (X), Valero Energy (VLO), Vertex Pharmaceuticals (VRTX), and Yamana Gold (AUY).
Wednesday
- The monthly ADP employment report will hit the Street on Wednesday, along with the ISM manufacturing index, construction spending, motor vehicle sales, and the regularly scheduled crude inventories report. Also, the FOMC will release its latest rate decision at 2:00 p.m. Eastern. Companies stepping up to the earnings plate include Merck & Co. (MRK), Facebook (FB), Visa (V), MasterCard (MA), Chesapeake Energy (CHK), Allstate (ALL), CBS (CBS), Clean Harbors (CLH), Comcast (CMCSA), CVS Caremark (CVS), Exelon (EXC), Garmin (GRMN), Genco Shipping & Trading (GNK), Humana (HUM), James River Coal (JRCC), JDS Uniphase (JDSU), Marriott International (MAR), MetLife (MET), Time Warner (TWX), Viacom (VIAB), NutriSystem (NTRI), Seagate Technology (STX), Shutterfly (SFLY), and Yelp (YELP).
Thursday
- Thursday's economic docket will feature weekly jobless claims, the trade balance, and first-quarter productivity and unit labor cost data. Wall Street can expect earnings reports from LinkedIn (LNKD), General Motors (GM), Alpha Natural Resources (ANR), Beazer Homes (BZH), Gilead Sciences (GILD), Kellogg (K), Kraft Foods Group (KRFT), MGM Resorts International (MGM), Nu Skin Enterprises (NUS), OpenTable (OPEN), Randgold Resources (GOLD), Royal Gold (RGLD), Teva Pharmaceutical Industries (TEVA), Skullcandy (SKUL), Tempur-Pedic International (TPX), Weight Watchers International (WTW), and Zagg (ZAGG).
Friday
- The week concludes on Friday with the Department of Labor's nonfarm payrolls and unemployment data, factory orders, and the ISM services index. Automatic Data Processing (ADP), Duke Energy (DUK), American Axle & Manufacturing (AXL), Newell Rubbermaid (NWL), and Pilgrim's Pride (PPC) will wrap up the week's slate of quarterly earnings.
And now a sector of note...
Airlines
Bullish
The overlooked airline sector has piqued our contrarian interest, as skepticism seems unreasonably heavy on this outperforming group. The NYSE Arca Airline Index (XAL) is up 25.9% year-to-date, easily besting a gain of 10.9% for the S&P 500 Index (SPX). XAL recently bounced from a test of its 40-day moving average, which has served as a key layer of support since the second half of 2012. What's more, industry bigwigs US Airways Group Inc (NYSE:LCC), Delta Air Lines, Inc. (NYSE:DAL), and Southwest Airlines Co. (NYSE:LUV) all reported solid earnings last week, underscoring the fundamental strength in the sector. Nevertheless, Wall Street's attitude toward airline stocks is downright grim. Among the 21 stocks we track under the "aerospace/airlines" umbrella, 91% are trading above their respective 200-day moving averages, yet only 58% of analyst ratings on the group are "buys" -- down from 61% a year ago. Meanwhile, short interest on the group has increased by 7.4% over the past year, and these stocks now carry an average short-to-float ratio of 5.6%. As airlines continue to soar on the charts, a gradual shift in sentiment toward the bullish end of the spectrum could provide steady tailwinds.
Prepare for the investing week ahead. Every week, Bernie Schaeffer and his staff provide you with their insight about what has happened and, more importantly, what will happen in the market. We dig deep and show you what's happening behind the scenes, and tell you which indicators are predicting major market moves. If you enjoyed this week's edition of Monday Morning Outlook, sign up here for free weekly delivery straight to your inbox.
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