Sell in May & Go Away?

12 June 2017

By Mike Coffey

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Well known trading adage Sell in May and Go Away warns investors to sell their stock holdings in May, in order to avoid a seasonal decline in equity markets for the period between May and November. According to Investopedia, since 1950, the Dow Jones Industrial Average has had an average return of only 0.3 percent during the May to October period, compared with an average gain of 7.5 percent during the November to April period.

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Last month, traders who followed this strategy seemed to be in pretty good shape, as the broad markets fell over 2 percent on May 17th. Reports that President Trump had allegedly asked FBI Director James Comey to back off an investigation of former National Security Adviser Michael Flynn prompted some congressional republicans to call for further investigation, which once again brought in whispers of a possible impeachment. The news pushed stocks lower around the world, and the U.S. dollar and government bond yields followed suit as traders feared that Trump’s agenda of boosting growth in the economy would now be at risk.

In our May recap, Cory Todd, our VP of Quant Development reported that despite the record run in equities, traders were taking a bullish stance in gold (typically seen as a defensive play). You’ll remember that last month, Q4’s Sentiment Indicator (SI) for GLD was elevated at the end of April. It had been hovering around the mid-twenties for the entire month, encompassing the French election. Cory found it interesting that it remained heightened, even after those election fears subsided. The VIX was low and it didn’t appear that the market was expecting any massive sell offs; however, GLD’s SI was saying that, although the market seemed stable, there was still upward expectations for the gold market itself. Buyers of gold on the date of our last blog (May 4th) made out well as the GLD (gold index) had jumped over 5 percent.

While we are only a little over a month into the Sell in May and Go Away strategy, the early returns are not encouraging for those betting on a move lower. The market has brushed off incredibly bad news flow. Stock charts continue to move up and to the right despite a bombing in the U.K., a China credit rating downgrade, a Federal Reserve that has the intent to continue to move interest rates higher, and or course,  more turmoil in the White House. Despite all of this, the Nasdaq surged 2.5 percent in May while the S&P 500 tacked on 1.2 percent.

It is interesting to note that the Russell 2000 (small cap index) did not follow suit. Small caps were the early leaders in the clubhouse, surging after Trump was elected on hopes that a corporate tax cut would go right to the bottom line. No stocks trade up in a straight line, but the index’ divergence is worth noting.

Given the continued strength in equities, where does this leave us from a valuation standpoint? According to Factset, the forward Price to Earnings ratio on the S&P 500 sits at 17.7. This compares to the five year average of 15.3 and the 10 year average of 14.0. As we roll deeper into BBQ season traders appear to be somewhat complacent despite the higher valuations. The VIX finished at 10.41 on May 30th, one of the lowest monthly closes in history.

So the question remains will profit takers finally surface or do stocks continue their meteoric climb? Stay tuned.

 

Mike Coffey is head of Business Development, Intelligence at Q4 and has over 20 years experience in the capital markets. Mike is a monthly contributor to Q4 blog.

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