Does Sell in May and Go Away Really Work?

We Put it to a Test

Preface

By now it’s no surprise that the FOMC is expected to hike by 25bps on Wednesday, and it’s such a formality that the market seems to be completely indifferent to it.

The S&P500 closed right at its high of the week on Friday, as advanced GDP numbers showed a cooling economy and PCE core inflation fell in line with expectations.

Not only that, but earnings have been robust this season. More than 50% of the S&P 500 has now reported so far and 79% have beaten earnings estimates! If you exclude financials, it’s around 85%. Betting against the market in pre-election years is typically a bad idea!

Quick Takes

It’s been a while since we’ve done this segment, so welcome back Quick Takes!

Buying a home is good, they said. It’s the best investment you can make, they said.

Remember that time we got Gox’d? Oh, yeah.

ZkSync is in all likelihood the most sought-after airdrop of the year…and certainly since Arbitrum. The LayerZero integration makes it even more exciting!

You’re gonna want to hold your ear close to the ground on this one imo.

Economic Calendar

Highlights

  • ISM Manufacturing PMI – Monday
  • JOLTS Job Openings – Tuesday
  • ISM Services PMI – Wednesday
  • FOMC Interest Rate Decision – Wenesday
  • Nonfarm Payrolls + Unemployment Rate – Friday

Breakdown

ISM Manufacturing PMI – Monday

Manufacturing has been on the decline over the past 10 months, but is expected to show a slight uptick in April. Remember though, only a reading above 50 suggests that business activity expanded during the survey period.

The longer manufacturing remains in contraction, the higher the likelihood of a recession. For now it remains above the 2020 Covid lows.

JOLTS Job Openings – Tuesday

Job openings are forecast to have dropped slightly in March, following a surge in December and a tapering off since then. In the second image, we can actually see that the monthly chart has flipped to a downtrend after printing a lower high and lower low. Another down month could add confirmation.

ISM Services PMI – Wednesday

The services sector bottomed in December and has been stronger than manufacturing, but it’s experiencing somewhat of a double-dip effect. Long as it stays above 50, this signals the economy remains relatively stable and discretionary spending is still fairly strong. Dip below 50 and that could signal trouble ahead for the markets.

FOMC Interest Rate Decision – Wenesday

Over the past several weeks, expectations for a 25bps Fed Funds rate increase in May have firmed up. In fact, even the expected path for the remainder of the year has been stabilizing after a wild period of volatility and uncertainty. This has allowed the stock market to rally.

Don’t get me wrong, we could experience a banking crisis spillover that causes the Fed to take more drastic actions. For now though, it’s looking like one more hike before a pause until at least late summer. The market believes that the Fed will start to cut in September or November at the latest. There is no meeting in October.

Nonfarm Payrolls + Unemployment Rate – Friday

NFP have been tapering off since the spike in January, and that trend is forecast to continue in April. What this shows is a gradual cooling in hiring as the economy resets following pandemic distortions and as higher borrowing costs and prices force them to cut costs. Unemployment is forecast to show a small uptick to 3.6%.

If instead we go the other way and the labour market shows signs of reheating, this could shift the potential Fed pivot further out.

Seasonality

You’ve heard the old axiom ‘Sell in May and go away’, but does it really work? Well the truth is, this hasn’t been overly reliable in recent history. Looking back over the past 10 years, you would have been better off selling in early June most years.

If we go back 20 years to 2003, however, we see that the theory holds more water. Aside from March and Sept-Oct, May-June has been one of the worst periods to deploy capital.

If we go back 30 years to 1993, we again see a tendency for June to perform worse than May. Again selling in early June appears best for equities. This is a generality, of course. If you’re a seasonal, cyclical trader then this may not apply. For example, you may enjoy playing the seasonal strength in travel, leisure, tourism, and home improvement.

Jay Charles

Editor in Chief, The Trading Tank.

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