Sell in May and go away

Sell in May and go away?

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 1^st, 2020, the S&P 500 opened at 2,869.09. On October 31^st, 2020, it closed at 3,269.96, a gain of 400.87 points- quite an impressive gain!

Source: Tradingview, City Index

However, since then, the S&P 500 has moved from 3,296.20 to a high of 4,218.78 on April 29^th, a gain of 922.58 points!

Source: Tradingview, City Index

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.

How does the stock market work?

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 30^th lows to the April 29^th 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.

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