Bearish Seasonality Ahead for the S&P 500

Bullish investor sentiment won't help, either

Senior Quantitative Analyst
Apr 26, 2023 at 8:00 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. The six-month period from May through October has been the worst six-month time frame for the S&P 500 Index (SPX).

Since 1964 (when we have data on the II poll which I get to in the next section), the S&P 500 index has averaged a return of just 1.44% from May through October, but 6.38% from November through April. The trend is the same over the more recent time frame of the last 25 years too. This week I will break these historical returns down a couple more ways to fit them with the current environment.

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Sentiment Survey Shows Investors are Bullish 

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, the percentage of bullish newsletters went above 50% for the first time in over a year. This is more bad news for the next six months.

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 above 50% at the end of April, the S&P 500 averages a loss of 0.26% over the next six months with 55% of the returns positive. Otherwise, the index gains an average of about 2.3% with around 70% of the returns positive.

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Mediocre Trading Range 

Here’s another way I looked at it. Over the past year, the S&P 500 saw a high of around 4,300 last August to a low of about 3,575 in October. Since October, stocks have rallied putting the S&P 500 at around 70% of its 52-week range. The table below shows the index has done its best over the May through October period when it’s near a high entering the month of May. Specifically, when its 52-week range is above 90%. Where it sits right now, the S&P 500 has averaged a gain barely above breakeven, 0.29%, over the next six months. This is better than when the index is closer to its 52-week low than its high in which case it averaged a loss of almost 1% over the next six months.

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Naturally, I wanted to know how the index performed when the bulls in the II poll were over 50% and the index sits in the 50% to 90% level of its 52-week range. The table below shows each of these instances. The last time was 2015 in which the S&P 500 was about flat over the next six months. 1978 is the year that most closely resembles the numbers of the current year. For that May – October period, the S&P 500 fell about 4%. The best year in the table saw a 5.6% return in 1985.

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