June Market Swoon Ahead? Maybe Not, Traders Say
Bulls cheered as stocks defied the traditional "sell in May and go away" pattern this year, and traders say investors may not have to worry about a "June swoon" either.
"I wouldn't be shocked if after this rally we had some weakness, but it won't be too significant—maybe a 2 to 4 percent pullback," for the month, said Ryan Detrick, senior technical strategist at Schaeffer's Investment Research. "Strong strength has a funny way of continuing even if we're overbought."
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The traditional Wall Street adage 'sell in May and go away' failed to play out this year, with the Dow Jones Industrial Average and S&P 500 advancing nearly 2 percent each last month. With May's rally, the Dow posted its sixth-consecutive month of gains, while the S&P 500 logged its seventh back-to-back month in positive territory. And so far in 2013, both averages have surged more than 15 percent each.
"I have never been a big believer in these seasonal effects," said Ed Keon, portfolio manager at Quantitative Management Associates. "You have 12 months in the year. Stocks prices fluctuate. I've never put much faith in 'sell in May' as a real determinant of stock returns and it doesn't tell you anything one way or the other."
Meanwhile, investors have questioned whether equities will see amplified losses in June—an already typically weak month for stocks—because the market avoided its long-awaited selloff in May. Since 2000, June is tied with September as the worst-performing month of the year for the Dow, with an average loss of 1.75 percent. And the month is the second-worst for the S&P 500, with an average loss of 1.39 percent.
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"Strength begets strength. When you have a good kick off to the year, the market in general doesn't see a big selloff," reassured Detrick. "While June is historically one of the weaker months, we don't necessarily expect a big June swoon."
Still, some strategists cautioned there are factors that could turn the market's upward momentum around.
"The market's less than 1 percent from its recent highs, sentiment's fragile and starting to turn, we're in Fed taper-watch mode and I think we're going to see a bumpy road for the economy," said Art Hogan, managing director at Lazard Capital Markets.
Stocks have had a rocky start to the month. On Tuesday, the Dow saw a wide intraday swing of more than 200 points, eventually wiping out nearly half of Monday's gains. Intraday swings have increased in last few weeks as investors continue to question when the Fed may begin to scale back its bond-buying program.
The debate over Federal Reserve tapering will also make the monthly government employment data especially important this Friday, as the report is a key factor for the Fed's decision on monetary policy.
"At the same time, if you look at the multiple on the broader market...stocks are still attractively priced," Hogan added. "Market timing is very difficult and you have to focus on long-term investment horizons."
Meanwhile, Detrick found that when the S&P 500 was higher for the first five months of the year, which happened three times over the last 30 years, the average return for the index was approximately 27 percent, versus an average return of about 7.5 percent in the other 27 years.
Similarly for the Dow, when the blue-chip index was higher for the first five months of the year, which happened seven times in the last 100 years, the average return for the index was also nearly 27 percent, versus an average return of under 6 percent in the other 93 years.
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Interestingly, however, the average return was slightly negative in June for both the Dow and S&P 500 when the first five months were higher.
"The bigger picture is that the overall market play is extremely bullish when the first five months are positive like we've seen this year, even if June happens to be a bit on the weaker side," explained Detrick. "There's still a greater likelihood that we're going to be higher this time next year."
—By CNBC's JeeYeon Park. Follow JeeYeon on Twitter
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