I mentioned seasonality in this morning’s Money Morning Buzz Outlook so let’s take a quick refresher look at how the seasonal trends shift as we head into May.
The answer is simple, yet complex. It all comes down to psychology and earnings (to some degree).
First, the psychology. Investors like things to be simple. Sayings are easy to follow. I’m talking about something as easy as “Sell in May…”, “Buy the October Dip”, “Buy January’s Pullback.” You’ve probably heard them all and for the most part, the have some effectiveness because investors “believe” they work so they follow them.
“Sell in May” is somewhat effective, but only because of a few bad months within that stretch. June is one of them, August and September are the others.
Over the last 20 years, the month of June has racked average losses of 0.4%. That’s low enough to count it as the second wort month of the year. September is the worst, more than doubling June’s bad performance.
I mentioned earnings as a driver in the seasonal trends. Take note of the performance of each of the months that earnings season begins and their performance. Simply investing in these months would net a positive return with lower volatility.
The twist is that the market is dealing with uncertainties and volatility that is typically reserved for the later months of the year.
Elections and other uncertainties tend to happen in the August-November period, which is one of the reasons that this “season” is the worst for stocks.
Slower monthly trading in August and September also increases the day-to-day volatility, but the general tone through these periods has investors either on the sidelines or out of the market completely.
Here’s the real twist though. Remember that I said that investors like to keep it simple, which is why these rules work. We’re likely to see a resonating move to “sell in May” this year due to the higher-than-normal volatility.
The last time we saw this increase in volatility heading into the “sell in May” period was 2022. The stage had been set by the regional bank meltdown earlier in the year that had spread to the rest of the market. While the banking crisis had been averted, investors saw the pre-May volatility as reason enough to follow the simple rules of engagement.
Stocks fell another 15-20% from their April levels to the October lows that posted the bear market bottom and beginning of the real recovery.
For those out there looking to trade some of the shorter trends, stocks did see a strong 20% rally in July – one of the strongest seasonal months due to earnings – that immediately turned south for another 20% ride lower into those October lows.
May and June are bad months for stocks, period, end of sentence.
The fact that we’ve got September and October style volatility during that weak seasonality puts even more pressure on stocks as investors will be looking to follow the simple “Sell in May” rule.
While there is room for relief in the headline risks for the market – a’la trade war relief – investors would be incredibly wise to monitor the technical trends above all else over the next 3-4 months.
Of course, I’ll do that right here for you.
