'Sell in May, Go Away' May No Longer Apply, Say Traders
Now that the Dow has cracked 15,000, the argument for "sell in May" may be getting weaker.
"My next target is 15,200," said Paul LaRosa, technical strategist at Maxim Group. He said all key indices—the Dow, S&P 500, Nasdaq, Dow Transports, and Russell 2000—have hit new highs, confirming the bullish trend.
"It says it's healthy, and everyone's saying 'sell in May and go away.' It's not based on anything but seasonality and phrases. The signs point to: 'Any dip. you want to be buying,'" he said.
S&P Capital IQ chief equity strategist Samuel Stovall said when stocks start the year off strongly, as this one has, history shows that the May to October period sees a gain. That was not the case in the last three years when the stock market slumped, and many traders and strategists thought this year could be similar.
"In those years in which the S&P was up in both January and February, the market rose an average four percent from May through October, versus the more normal 1.2 percent for all years," he said. An exception was 2011, when the year started out strong, but stocks fell into a midyear slump, losing 19.4 percent, nearly entering bear market territory.
While there could still be a sell off, Stovall said it would probably be shallow. In 23 years, there have only been three years where there was not a decline greater than five percent. So far this year, the declines have been shallower than five percent. The S&P 500 is up 14 percent year-to-date.
"The odds are in an investors' favor that they should not sell in May, following a good start to the year," he said.
Investor sentiment has changed markedly since last Friday's April employment report showed 165,000 jobs created, and upward revisions for February and March. Since then, German industrial data has been better than expected and China's export data surprised on the upside.
Stocks have also been stoked by central bank activities around the globe. The Bank of Japan has a major asset buying program, while the European Central Bank cut rates last week and the Reserve Bank of Australia cut rates Tuesday. The Fed last week reaffirmed that it is continuing its zero rate policy and its $85 billion a month asset purchase program.
"We've had a bull market type advance since mid-November, but we've been in this since March of 2009. I don't think it's tattered," said Stovall. "I think maybe a lot of investors are gaining religion…the thing is they do it sporadically, meaning they don't do it all at once. Bull markets take the stairs, but bear markets take the elevator."
Gina Martin Adams, institutional equities strategist at Wells Fargo Securities, warns that this is the week where stocks have begun to fall apart in Mays past.
"It's a fascinating start to the month of May. At least so far, it's included a cyclical rotation into risker asset classes. In a lot of ways, it's a reverse of March and April, but I don't want to get too carried away," she said. Adams said the earnings outlook does not support a rising stock market, and she expects the market to ultimately recognize that.
Among the best performing sectors so far in May are industrials, consumer discretionary, energy, and tech, all sectors that do better in a global growth environment. The laggards this month include utilities, telecom, and health care, which include safe havens and dividend payers that have been the best performers of the year-to-date. Financials fall into both groups, among the year's top performers and also recent winner.
"It's still a very short time since the cyclicals have taken over, but if the market is posting nice advances and it's not led by the cyclicals that would make me feel it's an artificial advance," Stovall said. But the defensive sectors shouldn't be counted out, and they may still find support because they often are the best dividend payers and investors are looking for yield.
LaRosa said the rotation into cyclicals is a healthy sign. "This year, we're surging into May. You have to be nimble. The opportunities are different. You can buy the consumer products companies, they had great runs, but we're comfortable with technology names at this point. They have great risk/reward. You just can't chase those companies that have had terrific runs for the last five, six months. They are probably extended," he said.
He also likes some financial companies, such as asset managers.
"You want the financials to be involved. You have to have financials come in. What we're seeing is stronger profits but not as strong revenues so companies are squeezed," LaRosa said. "I think they're going to need a revenue rebound for profits to exceed expectations in the next year. The real key issue is can it continue and how much more can they cut with the revenue base they have," he said. If the stall out in revenues does not reverse in the next two quarters, stocks could run into trouble, he said.