How Stocks Could Fare After a Bruising May

Put options are an ideal way to hedge against short-term downside risk

Karee Venema

May 30, 2019 at 11:12 AM

The U.S. stock market got off to a rip-roaring start in 2019, with the S&P 500 Index (SPX) surging more than 17% year-to-date through its April 30 close. The broad-market index started the month of May off strong, too, hitting a record intraday high on May 1, before the cards came crashing down on renewed U.S.-China trade tensions. The SPX is now pacing for a 5.2% monthly loss, and could be in for more short-term trouble, if history is any guide.

Looking at data over the past 25 years, Schaeffer's Senior Quantitative Analyst Rocky White found eight other times when the SPX was negative for the month of May. While the index went on to average a June gain of 0.16%, with 63% of the returns positive, it averaged a negative return of 2.65% over the three-month summer period (June through August), with just a 50% win rate.

spx returns since 1994 when may down big

Widening the scope to look at data since 1950, White found 10 instances in which the SPX ended May down 4% or more. While June averaged a loss of 1.14%, with a 50% win rate, the index was up 2.73%, on average, over the three-month summer period, with 60% of the returns positive.

spx returns since 1950 when may is down big

Whichever way you slice it, June through August has generally been a bearish period for the stock market, with the SPX averaging a 0.09% loss during that three-month time frame over the past 25 years. And with China set to initiate a new round of tariffs on U.S. goods this Saturday, June 1, it could be prudent to "prepare for a decline ... by buying put options on broad-based equity [exchange-traded funds] ETFs, as Schaeffer's Senior V.P. of Research Todd Salamone suggested in this week's "Monday Morning Outlook."

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