Sell in May and go away?
Joe Perry April 30, 2021 11:03 AM
An adage that refers to selling stocks in May and buying them in November
Sell in May and go away is an age-old adage that refers to selling stocks in May and buying them in November. It basically says that the returns from November through April tend to outperform the returns from May through October. The theory suggests that returns are worse during the summer months because people are “out of the office” or on vacation. Therefore, returns are better in the winter months when people are “back in the office”. As a result, stock market indices would have lower or negative returns during the 6-month summer period than during the winter months.
However, during a period of a global pandemic, it becomes a bit more complicated. Last year, stocks tanked during the initial crash in March 2020 at the beginning of the pandemic. Enter 0% interest rates and QE+++, and stocks have been on fire since, rising to at or near all-time highs. On May 1st, 2020, the S&P 500 opened at 2,869.09. On October 31st, 2020, it closed at 3,269.96, a gain of 400.87 points- quite an impressive gain!
Source: Tradingview, Forex.com
However, since then, the S&P 500 has moved from 3,296.20 to a high of 4,218.78 on April 29th, a gain of 922.58 points!
Source: Tradingview, Forex.com
But with inflation and yields rising, how much longer will it be before the Fed puts on the breaks and begins tapering? According to Jerome Powell from the FOMC press conference earlier this week, it will take some time to meet the substantial further progress that is necessary for the Fed to begin tapering. In addition, although there will be updated growth and inflation forecasts at the June and September meetings, the FOMC wants to see ACTUAL data, not forecasts.
Currently, price is diverging from the RSI, so it is possible we see a near term pullback during the month of May. However, despite stellar Q1 earnings (thus far) and increased employment, the Fed is far from reaching its criteria (although on its way). Even if stocks pull back to 3,836, it is only a 38.2% correction from the October 30th lows to the April 29th highs, as well as, a 10% pullback off the highs.
But when could the Fed let the markets know that tapering is ahead? One guess is the Jackson Hole Symposium in August. Another is the September FOMC meeting. By the time these events roll around, if the data continues to be strong, the FOMC will has a “string of months” (Powell’s words) worth of data to decide. If they announce tapering, stocks should come off aggressively, as Powell noted they will let the markets know well in advance of any tapering.
So, will sell in May and go away work this year? Answer: It’s complicated.
Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.