Sell in May and Go Away? Maybe...
Here is how I’m navigating the market as we enter the weakest six months of the year.
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Stocks have bounced back from a weak open, but breadth is poor, with around 3,300 gainers to over 5,550 decliners. There are some very poor responses to earnings, such as Uber UBER, TripAdvisor TRIP, and Shopify SHOP.
Some dip buyers pursued the Magnificent Seven names on the weakness, but the Russell 2000 IWM is lagging, and the number of stocks hitting new 12-month highs is contracting. It isn’t terrible action, but the question is whether some support will form and support another leg higher.
One of the issues the market faces going forward is negative seasonality. There is always a lot of discussion about an old market adage, "Sell in May, and go away." That has not worked so well in recent years, but it is important to remember that seasonality is an inclination and not a certainty. May is historically the kickoff of the weakest six-month period of the year.
It is important to understand what drives seasonality. The conditions don’t always exist, but when they do, they can make weakness more self-fulfilling.
May is notable because it is the end of first-quarter earnings season. Market participants are digesting the news and debating whether they want to put more capital to work or maybe reduce some winners and stand aside. Why tie up capital at this point when there won’t be more substantial capital inflows until later in the year?
My stock shopping list tends to change quite a bit in May as I consider earnings reports and potential summer catalysts. I don’t want to put capital to work too quickly if there isn’t any immediate catalyst or if the stock isn’t a great bargain
This year, the market had a great run in the November-April time frame. That is historically the best six-month period and makes it more likely that it will be followed by the worst six-month period from May to October. The one great certainty of the stock market is cyclical action, and the conditions are ripe for a turn in the cycle in May of this year.
I don’t plan to sell in May and go away, but I am going to manage my positions carefully and won’t rush to put precious capital to work. I reduced my Uber position Wednesday following the poor response to its earnings.
At the time of publication, Rev Shark was long UBER.
