Old market adage 'sell in May and go away' is getting more appealing with a June pullback in sight

Published Fri, May 29 202010:58 AM EDTUpdated Fri, May 29 20202:45 PM EDT

Key Points

"A bunch of things are lining up— you've got seasonals, you've got technicals, geopolitics and fundamentals — They all seem to be aligning for at least some sort of pause and pullback," said Jeffrey Hirsch, who runs Stock Trader's Almanac.
Hirsch said the Moving Average Convergence Divergence (MACD), a trend-following momentum indicator, triggered a sell signal on the Dow and the S&P 500 on May 13.
Rising U.S.-China tensions have increasingly weighed on the market.
June also coincides with a couple of key market events that will likely stir up the volatility, including the quarterly triple witching.

The legendary "sell in May" Wall Street adage carries an ominous sign for stocks in the second half of the year. And market signals, left and right, are now making a stronger case for that simple strategy to come true once again. The old "Best Six Months" strategy, which is the theory behind the "sell in May and go away" mantra, means investing in the Dow Jones Industrial Average between November and April and taking off risk from May to October, a period where the market is more prone to sell-offs historically. The market has had an impressive two-month run on reopening optimism, with the S & P 500 bouncing 38% off its March low and crossing its 200-day moving average this week, a widely watched momentum indicator. However, a number of negative catalysts have popped up. "A bunch of things are lining up— you've got seasonals, you've got technicals, geopolitics and fundamentals — They all seem to be aligning for at least some sort of pause and pullback," said Jeffrey Hirsch, who runs the Stock Trader's Almanac, keeper of all kinds of market statistics. "A lot of fronts are pointing to a rally running out of steam." HIrsch, whose father, Yale Hirsch, discovered and popularized the "Best Six Months" strategy, stressed that the "sell in May" saying shouldn't be interpreted as the month of May will be negative. "It doesn't mean sell May 1 and it doesn't mean the market has to be down in May," Hirsch said. "The market has historically gained very little ground from May through October and has a tendency to bounce around and go sideways. It's also prone to corrections especially in August, September and October." The S & P 500 and the Dow are on track to post a more than 3% gain each for the month of May as investors became more hopeful that a recovery from the coronavirus will take hold. Sell signal triggered However, there has been more caution on Wall Street about the rising U.S.-China tensions, which weighed on the market on Friday. The White House has expressed anger towards China over its handling of the coronavirus. The rift escalated after China approved a national security bill for Hong Kong that experts warn could endanger the city's "one party, two systems" principle. From a technical perspective, things could get ugly from here. Hirsch said the Moving Average Convergence Divergence (MACD), a trend-following momentum indicator, triggered a sell signal on the Dow and the S & P 500 on May 13. The tech-heavy Nasdaq has a "Best Eight Months" pattern that calls for a weaker period starting July 1, and Hirsch said a sell signal can be triggered as soon as the close on June 1. Many technical indicators are now "overextended" after the swift rebound, Hirsch said. "Just because it crossed the 200 day, it doesn't mean that 200-day is now support. It still hasn't fully cleared yet," Hirsch said. June also coincided with a couple of key market events that will likely stir up the volatility. Triple witching, the quarterly expiration of stock options and futures, as well as the annual rebalance of Russell Indexes, will take place at the end of June, Hirsch noted. Subscribe to CNBC PRO for exclusive insights and analysis, and live business day programming from around the world.

Two men wearing a masks walks pass the New York Stock Exchange (NYSE) on April 30, 2020 in New York City.

Johannes Eisele | AFP via Getty Images

The old "Best Six Months" strategy, which is the theory behind the "sell in May and go away" mantra, means investing in the Dow Jones Industrial Average between November and April and taking off risk from May to October, a period where the market is more prone to sell-offs historically.