By: Costas Bocelli — May 15, 2019
I’m sure you’ve heard the old stock market adage, “Sell in May and go away”, haven’t you?
If you’re not aware, then let me tell you that we’ve “officially” moved into what’s considered to be the “seasonally weak” half of the year, which lasts from May through the end of October.
You see, according to the Stock Trader’s Almanac, if, on the first of every May since 1950 you’d bought into an index fund that tracked the performance of the stock market…and sold it every Halloween…
… you would’ve lost money!
In other words, welcome to the crummiest part of the year to be in stocks.
And based on the performance of the stock market since the calendar flipped to May, that rhyme has displayed some remarkably accurate market wisdom, wouldn’t you say?
At least through the first two weeks.
Since the beginning of the month, the S&P 500 has declined -3.8%, putting it on pace to be the worst May tumble in nearly 50 years, according to MarketWatch.
They blame escalating trade tensions between the U.S. and China for the sharp selloff.
Yikes! So, should we sell all of our stocks and move to cash?
No so fast!
While it’s true that there may be some seasonal headwinds to contend with, it’s important to not just blindly follow these seasonal patterns from year to year.
Instead, investors should assess the technical characteristics of the stock market and allow prices to dictate whether it makes sense to stick around or "go away."
And, as we move into the seasonally weak period in the market, U.S Equities are in a position of strength, not weakness.
You see, despite the poor start to the month, investors should not lose sight of the fact that the stock market is off to the best start to a calendar year in more than a decade.
Even with the S&P 500 down nearly 4% halfway through May, the large-cap index has gained +13% year-to-date.
(Click any image to enlarge)
U.S. Equities also command the top spot in our broad asset class relative strength rankings.
Cash, by the way, happens to be the second worst performing broad asset class in terms of relative strength, just ahead of foreign currencies.
Investors that have maintained an overweight to U.S. equities while it’s been the top rated broad asset class have been rewarded, even through the two significant market corrections we've seen over the past fifteen months.
As Chris Rowe noted earlier this week, the winter selloff left stocks in the most “washed out” (oversold) condition since the great recession lows of 2008.
And after a ferocious rally that began in earnest following Christmas Day, it’s not unusual to see some sort of pullback like we’re experiencing right now.
Referencing the S&P 500 chart, you’ll find that the index is pulling back from fresh record highs achieved on April 30th and is now approaching levels that could attract buyers.
Previous resistance around 2,800 in the index is now seen as support.
Plus, the 200-day moving average stands just below that at 2,775, which is another important technical level of support.
So this, and any further pullback should be considered a buying opportunity.
Stick with Strength
To take advantage of the broad market weakness, investors should continue to overweight the strongest sectors of the market and avoid the weaker ones…
…this course of action increases the odds of outperforming the market and growing wealth at a faster pace.
Over the past month, the Healthcare, Basic Materials, and Energy sectors have displayed the weakest relative strength, so you’ll want to avoid those groups.
Instead, Technology, Communication Services, and Financials have demonstrated the most relative strength over the past several weeks, so these are the ones that could offer the most attractive investment ideas.
3 Stocks That Possess Strong Traits of Technical Strength
In the Technology sector, you could consider Cadence Design Systems (CDNS).
In the Communication Services sector, you could consider Charter Communications (CHTR).
And in the Financials sector, you could consider Marsh and McLennan (MMC).
As you can see, all three of these stocks are in a long-term positive trend.
They also happen to be outperforming the broad market and are strong versus their sector peers on a relative basis.
So with U.S. Equities highly favored, investors would be best served by thinking less about “Sell in May and go away” and consider…
…avoiding (or selling) the poor performers and rotating into (and buying) the strong performers.
That’s a much better approach to investing than making decisions with a flip of the calendar.
Until next time!