Sell in May Strategy Could Be Wrong Approach This Year

Stocks are near record highs and sentiment is upbeat

Senior Quantitative Analyst
May 1, 2019 at 8:14 AM
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For those familiar with stock seasonality trends, “sell in May and go away” is a popular saying. The tables below explain where the saying comes from. Stock performance for the six-month period from May through October has been underwhelming compared to the other six months (November through April). Over the past 50 years the S&P 500 Index (SPX) averages a return of just 1.22% from May through October but 6.46% from November through April. The trend is the same over the more recent time frame of the last 20 years too. This week I’ll break these historical returns down a couple more ways to fit them with the current environment.

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Bullish Sentiment Around Stocks

Given the stocks market’s performance this year, it’s not a surprise that investors are giddy. A popular gauge of sentiment I look at is the weekly Investors Intelligence (II) poll. The survey considers more than 100 published investor newsletters and determines whether they are bullish, bearish or expecting a correction (short-term bearish but longer term bullish). In the last report, a lofty 53% of newsletters were in the bullish category.

Bullish sentiment has led to even worse returns than usual when it comes to the May-October returns. The table below shows when the bulls register in above 50% at the end of April, the S&P 500 averages a loss of 0.65% over the next six months with only half the returns positive.

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With Stocks Near All-Time Highs

This data is a lot more encouraging. The S&P 500 recently hit all-time highs, and when the index has ended April within 3% of its all-time high, the next six months have actually tended to be strong. In that case, the S&P 500 gained an average of 5.34% and was positive nearly 80% of the time. Otherwise, the returns are weak, averaging a loss.

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Bullish Sentiment and All-Time Highs

So, we have one study that suggests the bullish sentiment tends to have bearish implications. A second study looking at the returns after being near an all-time high suggests bullish implications. Naturally, let’s look at what has happened when both occur at the same time.

Over the past 50 years, there were seven instances when April ended with the S&P 500 near all-time highs and at least half of the newsletters in the II expecting bullish returns. Stocks performed reasonably well, averaging a return of 3.69% and just over 70% of the returns positive. Compare this to the other years in which the average gain was less than 1%.

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Finally, here are the seven years in which this occurred. The last time was two years ago and the S&P 500 gained 8% from May through October.

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