"Sell in May and go away" has officially begun
Subscribers to Chart of the Week received this commentary on Sunday, June 1. Click here to get your hands on our critically-acclaimed 18- pick stock report.
"Sell in May and go away" has officially begun for the stock market, an annual pattern of expected underperformance and lower volume on Wall Street between May 1 and the end of August. With May now in the rearview mirror, we're looking at the “go away” period for the summer for those who might not be ready to exit the trading-sphere just yet (or at all).
The S&P 500 Index (SPX) averages a 3% return between May and October, versus 6.3% between November and April, going back to 1990. For month of May this year, however, the SPX shook off tariff tensions from April and nabbed an impressive 6.1% gain. This marks the S&P 500's best monthly performance since November 2023, and its best May performance since 1990. The historical spread between summer and winter returns appears back on the rise, per the chart below from Investopedia.
While many choose to retreat, the summer doldrums also bring an opportunity for contrarians to bet more strategically on stocks and sectors that historically get more less attention during this time frame. Schaeffer's Senior Quantitative Analyst Rocky White helped gather a list of 25 exchange traded funds (ETFs) you might want to keep a close eye on this season.
Notice the SPX’s ETF, the SPDR S&P 500 ETF Trust (SPY), doesn't crack the top five performers on the list of ETF seasonality between June and August, spanning the past 10 years. At the time of this writing, the ETF is clinging to its year-to-date breakeven mark, with its 200-day moving average possibly ready to step up as support after serving as a ceiling earlier in the year. The ETF had breached this trendline in early March for the first time since October 2023. Per White, over the past decade the SPY has averaged a 4.6% gain during the three-month summer period, finishing higher 80% of the time. Such a boost would push the benchmark to a record $615 by September.
More notable are the five sectors outperforming the SPY on the list; iShares U.S. Home Construction ETF (ITB), Technology Select Sector SPDR Fund (XLK), SPDR S&P Biotech ETF (XBI), First Trust Dow Jones Internet Index Fund (FDN), and VanEck Semiconductor ETF (SMH). Topping the list is ITB, suggesting homebuilding upholds its reputation as a low-risk investment even during seasonally weak periods. However, with the ever-looming tariff turmoil starting to impact prices of raw materials, delays and costs could pose a risk. On Friday, the personal consumption expenditures (PCE) price index increased 0.1% in April, matching analyst estimates, suggesting some optimism among keeping pricing pressure capped. But it’s unlikely this will avoid the effects of Trump's levy policies for the coming months, signaling today's data release may be the calm before the storm.
iShares U.S. Home Construction ETF (ITB) averages a 7.7% return between June and August, historically, finishing positive 80% of the time. XLK is not far behind with its own return of 7.1% during this time frame, also with an eight out of 10-win rate, suggesting favorability among the hardware sector. Biomedics's XBI is sitting nearly even with FDN, both averaging a 6.9% return. Pulling a 5.1% average profit is SMH, still comfortably above the SPY. All three also sport 80% win rates.
The variety of outperformers during the summer months shows that there’s no rhyme or reason to seasonality. Whether you decide to channel your focus, a blanket consideration should be made for the uncertainty Trump's tariff tirade will bestow across Wall Street in the coming months — even years. Given the volatility ahead, outsized historical returns like the ones outlined above should be flagged for the summer.