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'Sell in May and go away' might not work this year

Stocks head into the last day of April in a cranky mood, but May might not be the time for a shakeout.

The old adage "sell in May and go away" seems like a good idea when looking at history, but some strategists see a few tailwinds that were not behind stocks last May when the S&P 500 hit its all-time high. This also does not mean the market will be spared a rocky time when it heads into June, when the Fed meets again and the U.K. votes on whether to leave the European Union.

"The market is right at the same level it was a year ago, but one difference was a handful of the larger stocks were holding up the market. This year it's practically the opposite," said Paul Hickey, co-founder of Bespoke. "We're seeing strong breadth in the market. As long as that holds in there, it's a reason to hold in May, not sell in May." May has been the one of the weakest months with a basically flat performance on average. Over the last 20 years, the Dow was up an average 5 percent but finished lower half the time, according to Bespoke.

The S&P 500 shed nearly 1 percent Thursday, ending the day at 2,075, in its worst day since April 7. For the month, the S&P is up 0.8 percent. Investor Carl Icahn told CNBC Thursday he sold his stake in Apple, and the stock tumbled, weighing on sentiment and the indexes. The lack of action by the Bank of Japan also added to the sour mood.

For Friday, traders will be watching the Fed's preferred inflation measure, the PCE deflator, when it is released at 8:30 a.m. EDT along with personal income and spending data. The employment cost index for the first quarter is also expected. At 9:45 a.m. Chicago PMI is reported and consumer sentiment is released at 10 a.m. EDT.

Earnings are expected from oil majors ExxonMobil and Chevron. Sanofi, American Tower, Phillips 66, Royal Caribbean, Seagate, TransCanada, Monster Beverage, Cabot Oil & Gas, Calpine, Eaton and Host Hotels also report.

But "sell in May" is on traders' minds after a choppy day.

"It's not necessarily that the market goes down. It's just weaker returns. It has been historically a weaker period for the market," said Hickey. "Seasonalities are things we factor in our analysis but they are not the ends all and be all." He said the Fed, economy and, for now, commodities markets are much greater factors.

Daniel Suzuki, Bank of America/Merrill Lynch equity strategist, said one reason the rally could continue and market can go higher is underweight positions and a lack of positive sentiment.

"The main reasons I think the market can grind a little bit higher, for one, is positioning. This has been a rare rally in that we haven't seen a lot of fund participation," he said, noting the bank's monthly survey showed fund managers' cash holdings actually went up despite the rally. "People are skeptical of the rally. We've been near these levels for a little bit now and people have been inclined to want to sell the strength in the market." The lack of bullish sentiment is a contrarian indicator.

Suzuki said he also expects earnings to come in better than analysts expected and that should help stocks. But he also sees stocks ending the year at lower levels, with a target on the S&P 500 of 2000.

"Obviously off the February lows, we've had a spectacular rally with small and mid-caps up 20 percent, large caps up around 15 percent," he said. "Some of that rally we think is justified by improving macro data, but I think a lot of the good news is priced in. But there are reasons to believe the market can grind a little bit higher from here, although we would be fading the rally."

The sell in May phenomenon is not so much tied to May's performance but the fact that the market historically has weaker returns in the period from May to October, than it does in November to April. Over the last 20 years, the S&P averaged gains of 6.3 percent in the November to April period and was positive 85 percent of the time. But for May to October, it was up just 0.85 percent though it was positive 60 percent of the time, according to Bespoke.

Sam Stovall of S&P Global Market Intelligence said the seasonality this year is complicated by the fact it is the final year of a president's second term when the market is weaker on average. Since 1945, the November to April period in that final year has been positive 70 percent of the time but the gain averaged just 0.1 percent. In the May to October period, there was actually an average decline of 2.6 percent and the S&P was negative half the time. That compares to the fourth year of a first-term president, when the market is higher on average.

"Historically this is the kind of year" for sell in May, said Stovall, chief U.S. equity strategist. "We are in the fourth year of a president's term in office, in which two unknowns are running for president."

He said his strategy would not be to sell in May, but to "rotate, rather than retreat." He said consumer staples and health-care stocks historically show strong outperformance in the May to October period. According to Stovall, since 1990, the consumer staples sector outperformed the S&P 500 70 percent of the time in those months, with an average 4.6 percent price return. The S&P health-care sector averaged a 4.9 percent gain and outperformed the S&P 500 65 percent of the time in that same period.