'Sell in May' Debunked: S&P 500 Sees 1.8% Gain in Weak Period

Key Takeaway

• April's 3.0% S&P 500 decline broke a 5-month winning streak, defying its historical performance as a strong month.
• "Sell in May and go away" is challenged by DataTrek's analysis showing positive returns even during traditionally weaker June-October periods.
• Market timing strategies are generally less effective than long-term investment, emphasizing the importance of time in the market over timing the market.

April's Disappointment and Seasonal Trends

April has traditionally been a strong month for U.S. equities, with the Dow Industrials and the S&P 500 historically posting gains. However, April 2024 bucked this trend, with the S&P 500 down 3.0%, ending a five-month winning streak. This downturn has raised concerns as we enter a historically weaker six-month period from May to October, challenging the "Sell in May and go away" strategy. Despite this, Nicholas Colas from DataTrek's analysis of seasonal trends since 1980 shows that while the June to October period is weaker, it still averages a positive return of 1.8% for the S&P 500, suggesting that staying invested could be beneficial.

Momentum Traders and Equity Buys

Goldman Sachs predicts that momentum traders, particularly Commodity Trading Advisers (CTAs), are poised to buy $29 billion in global stock futures, including $8.5 billion in S&P 500 contracts, in the coming week. This forecast is based on the expectation of a market rally, with potential purchases even if stocks decline. This aggressive buying strategy is seen as a support for a rebound in global equities, following a volatile April influenced by concerns over the U.S. Federal Reserve's interest rate policies and persistent inflation.

Tech Sector Leads Amidst Rate Concerns

Despite broader market challenges, hedge funds have significantly increased their investments in technology stocks, marking the largest net buying activity since December 2022. The focus has been particularly strong on semiconductors, with hedge funds' allocation in this sub-sector reaching a five-year high. This investment surge, fueled by optimistic earnings reports from companies like Alphabet Inc. and Microsoft Corp., has led to a 5.1% gain in the S&P 500 Information Technology Index last week. This trend indicates a strategic bet on the technology sector's long-term potential, even amidst volatility and concerns over a higher-for-longer interest rate environment.

Street Views

• Nicholas Colas, DataTrek (Neutral on the S&P 500):

  "Not being invested during this timeframe therefore leaves money on the table, and every marginal percentage point of performance helps, of course."

• Jeff Hirsch, Stock Trader’s Almanac (Neutral on market timing):

  "The market has a tendency to be weaker in April and May after big Q1 gains in election years," but also noted that "the last seven months of the year tend to be up."