What to Expect from Stocks for the Next 6 Months

If past is precedent, there's a 50% chance the May-October period will be positive for stocks

Apr 30, 2018 at 2:09 PM
facebook X logo linkedin

The following is a reprint of the market commentary from the May 2018 edition of The Option Advisor, published on April 27. For more information, or to subscribe to The Option Advisor -- featuring 10 new option trades each month -- visit our online store.

You'll perhaps find it sobering to realize that we're currently at the tail end of what has been, historically, the stock market's most bullish six-month stretch of the year. Over the past 50 years, the November-April half has been positive for the S&P 500 Index (SPX) 76% of the time, yielding an average return of 6.47% and an average positive return of 10.83%.

By contrast, the May-October half is positive only 66% of the time, with an average return totaling 1.29%; plus, the average positive return is smaller and the average negative return larger than that of November-April.

spx returns by half

As of this writing, with mere days left to go before the books are closed on April 2018, the S&P is up just over 2% from its Oct. 31 close at 2,575.26 -- on pace to significantly undershoot not just its average positive return, but also its overall average return, by a fairly wide margin.

The graph below, created by Schaeffer's Senior Quantitative Analyst Rocky White, paints an exceptionally clear picture -- not only as to how the current November-April performance (in black) compares to that period's average trajectory (in green), but also of the not-at-all symbiotic relationship between these two bullish and bearish halves of the calendar year. While the November-April half typically charts a fairly steady path higher, the S&P's May-October path (in red) is a lazy, bumpy chop ranging between the general zones of "breakeven" and "slightly higher."

average vs current nov-april

Given that May-October seems to more or less "coast on the fumes" of the typical November-April rally, you could accurately describe the relationship between these two halves as "parasitic." But when the S&P is more or less limping into the month of May, how long until the momentum runs out altogether?

In the table below, White categorized the last five decades' worth of S&P returns into "brackets" to determine how the index typically fares during the May-October period based on its immediately preceding November-April performance. There's a solid sample size for each bracket, and the takeaways from this data set are instructive.

Going simply by average return, it looks like the "sweet spot" for the S&P 500 is a six-month return between 5% and 10% by the end of April. On 10 prior occasions where the November-April return has landed in this range, the index has gone on to average a 4.30% rise over the next six months, with an impressive 90% of those returns positive.

But while the average negative return for these results is the smallest by far (-1.59%), note also that the average positive return for this bracket is the smallest among the four. In other words, the May-October upside is steady and consistent (and far better than the overall average return of 1.29% for this period), but not necessarily staggering in its magnitude.

More momentum doesn't necessarily beget more momentum, though. In the 18 instances where the S&P gained upwards of 10% during the November-April half, the average return for May-October was 1.99% -- not too much better than a typical year. And only 67% of returns are positive in this bracket, nearly flat with the expected 66% for this time frame. Plus, the average positive May-October return after a blowout November-April is just 5.66%, compared to the "anytime" average positive return of 6.44%.

And when there's a relatively rare S&P loss registered over the November-April period, May-October goes on to follow suit. The average return is a loss of 2.45%, and the average negative return (-15.55%) is the largest by far of the four brackets. But what about when the S&P is neither "comfortably higher" nor "sharply higher" nor "surprisingly lower," but just -- as we are now -- "kinda higher" by the end of April?

First we'd note, per the table below, that when the index gains anywhere up to 5% during the November-April period, there's only a coin-flip chance that stocks will be positive during May-October. This is the lowest percentage of positive returns for all four scenarios analyzed in this study.

That said, the expected average return for the upcoming May-October stretch would be a slightly above-average 1.53%, with the average positive return weighing in at a best-in-class 10.31% (just shy of the average positive return for the November-April period, actually). Of course, this silver lining is immediately countered by the stat showing the average negative return -- which we're about 50% likely to experience -- is a drop of 7.26%, second only in magnitude to the losses registered in those years when not even November-April yields a gain.

spx may-oct returns by bracket

So let's hope that none of us were looking to this particular study for evidence that the volatile S&P chop we've witnessed lately is on its last legs, as we seem destined for an upcoming (continued) stretch of rapid, unpredictable price swings. But from a scholarly angle, perhaps we can at least appreciate the tidiness with which S&P closing lows in February and early April were contained in the 2,581 area, just above "breakeven" with the Oct. 31 close -- neatly mimicking the kind of support we often see come into play around year-to-date and year-over-year breakeven levels.


Unlock Weekend Profits with Chris Prybal's Favorite Strategy Up +487.5% in 2024

With the markets going left, right, and sideways, you need to have a plan now more than ever. 

Expert Trader Chris Prybal is no stranger to volatility, and has mastered finding big stock rallies while other traders aren't looking over the weekend. Rallies that produced gains like +207% on RTX calls, +236% on MARA calls, and +238% on NET calls.

A few simple moves on Sunday at 7pm could be the “Secret Sauce” your portfolio needs to not just stay afloat, but make unprecedented gains in this turbulent market.

Don’t sit on the sidelines, beat the market with Chris Prybal's strategy. Join him now!