Sell in May and Walk Away

One of the many isms that Brian teaches us at TRi is “sell in May and walk away.” Over the years the stock market has had a tendency to sell off and underperform through the months of May-October while typically performing more bullishly from November to April. Of course this isn’t set in stone, but we are seeing signs of selling right around now and I think we’d be wise as traders to consider this time of year and the potential for the markets to go soft through the spring. 

May is a time when market's often top. This is because of a number of factors. These seasonal pivots may be attributed to four fundamental drivers:

  • Government policy: Both the receipt and distribution of tax revenues can drive capital flows on national levels. Considering April historically has been a tax filing deadline, in years of high equity prices there is often a large flow of selling into the event. This year the US tax payment deadline was extended until May 17th due to Covid creating a longer selling window.
  • Business order flow: Since most capital projects require construction, North American ground conditions can dictate business activity. Based on this cycle, industry will schedule delivery of pre-purchased materials at the commencement of the construction season around ground thaw which is often marked with the Spring equinox.
  • Consumer behavior: After many months of being constrained, many consumers wish to 'hit the road' once the driving season begins. This is usually marked by the May 24th weekend. Industry will forward purchase goods and services anticipating the increased consumer demand into that event. Pent up demand from Covid lockdowns will probably increase this.
  • Weather related: From agricultural implications to construction considerations noted above, as the weather turns more friendly in the Northern Hemisphere, human activity increases. Business and industry will often 'mark up' prices heading into that event.

What’s Happening This Year

This year we are seeing some selling across the stock market and Bitcoin that started about mid April and has continued into May. 

In the stock market the sell off seemed to get started with the small caps when the Russell 2000 started a down move on April 29th. The Nasdaq followed on May 3rd with the S&P waiting until May 10th. The S&P has gotten a bounce back up towards its old highs but there’s no confirmation that the bull is back in charge and the bounce might be creating another short opportunity. The Nasdaq and Russell have bounced as well but have not reclaimed as much of the move as the S&P.

 

 

Interestingly, Bitcoin has seen the most significant down move and continues to push lower. It’s making another new low today and is down -34% from it’s local high from mid April. Unfortunately a weekly M did confirm on yesterday’s close which does not look good for the bulls. 

 

 

Last Year

It’s worth noting that last year had more of a Sell in May then fake out to the upside with price luring stock market sellers with a daily M top and then it quickly reversed and continued on a tremendous bull run. Of course Covid was driving the bus last year and that was bound to create so out of the ordinary effects so I’m not sure if it will have much correlation with other years.  

 

 

Where do we go from here?

In yesterday’s Broiler Chicken Show, Brian talked about how calling bottoms in May is going against your best interests and quite dangerous. I have to agree with him and I think patience is key here. Personally I will be waiting for the market to tell me what the next move is. I’ll be cooling my jets both in stock land and Bitcoin until I see strong confirmation of a bottom. Show me a W. Until then I see the market as looking heavy and would not be surprised to see price come off more. This could easily go on for a couple months so by all means be careful. 

Sentiment has shifted a bit and things are looking a little more negative. The attitudes of big market players such as Elon Musk appear to be dragging the market downward at the moment. It seems there’s some egos involved that are attached to the idea of certain outcomes and it’s not in our best interests to get caught in the middle of it. Remember, the market can remain irrational much longer than we can remain solvent. 

As always, plan your trades and trade your plan.  
-Kevin