Buy In May And Say Hooray?

• Sell in May does not have a great track record
• Technology continues to outpace staples, and that’s bullish
• Technology, consumer cyclicals and REITS are well positioned for a rally

Sell in May does not have a great track record

If there is a seasonal saying that seems ubiquitous at this time of the year it’s “Sell in May and Go Away”. If you don’t believe me, try doing a search for it in Google Trends, where the results spike every year around this time. The saying probably arose, because May begins a 6-month period of seasonal weakness and is occasionally associated with a nasty drop, although October is the real season for panics and crises. The fact is, most years the market ends higher in the fall than it does in May. According to Bespoke Investment Group, an investor, who invested $100 in the S&P 500 at the start of 1945 and held it through both six-month periods until today, would now have nearly $18,000. In contrast, that same $100 invested only during the “bullish” months between November and April would be worth about $8,100.

There is no denying that some years selling in May has made sense. Chart 1, for instance shows that in 2010 May turned out to be a poor month. However, by November, prices had recovered to their early May levels.  In 2010, for instance, the short-term KST was in a classic sell position indicating market vulnerability. Even with that negative picture going into the May/October period, it would not have paid to sell in May. Even so, it largely depends when you come back from being away. In 2010, cutting summer holidays short and returning around July 4 would have made sense, but after that the decline was over.

Chart 1

Obviously “Sell in May” will depend a lot on the early May technical position, and here the tea leaves look encouraging for 2018. Chart 2, for instance, shows that the SPDR Dow Jones ETF, the DIA is right at its correction down trend line and the 50-day MA. Both represent resistance in their own right, so if the Average is above to push above it, that would imply a rally taking prices back to at least a test of the January highs.

It’s true that the KST is in a slightly bearish mode. However, it is so finely balanced that a break above the 50-day MA would likely tip the balance to the upside, provided that the break were to hold. That seems unlikely, because we have just seen a whipsaw to the downside. That’s been flagged by the break below the red trendline in Chart 2.

Chart 2

Chart 3 shows recent action in closer detail in the form of an hourly chart. The false break below the neckline of the head and shoulders is fairly evident. Usually whipsaw moves, because they catch traders on the wrong side of the market, are followed by above average price moves.

Chart 3

The NYSE Composite also looks ready to break to the upside. Chart 4, for instance shows that new market trends often arise when it is possible to construct a trendline on the net new high data and that trendline is violated. We see four successful uses of that technique in the chart. This week, the new high data appear to be breaking their late January/early May down trend line. I say “appear” because the chart is only plotted until mid-Monday and previous plots reflect closing data. You can always update the chart going forward by just clicking on it.

Chart 4

Technology continues to outpace Staples, and that’s bullish

Chart 5 features the ratio between the more speculative technology ETF, against the defensive consumer staples (XLK/XLP). A rising ratio indicates investors are growing in confidence because they are bidding up the more speculative technology stocks and vice versa. This relationship broke out from a huge base some time ago and continues to rally, despite the February/May correction. Note that, using the benefit of hindsight, the green shadings reflect a rising ratio and this typically results in a rising S&P as well. The recent breakout suggests that the market will move higher but in addition, it will become progressively more speculative as it does so.

Chart 5

Technology, Consumer Cyclicals and REITS are well positioned for a rally

Charts 6,7 and 8 feature three sectors that look well positioned to participate in any rally going forward.  The SPDR Technology ETF, the XLK, has just broken above its correction down trend line and experienced a KST buy signal.  The KST for relative action is also positive and certainly supporting the May breakout to a new bull market high in relative strength.

Chart 6

Chart 7 features the SPDR Consumer Discretionary (Cyclicals) XLY. Here the situation is not quite so positive as with the XLK as the price is right at, not above, its correction down trend line. That down trend line is pretty impressive as a resistance zone, so its penetration will be a significant technical development, provided it takes place. However, three bullish aspects include two positive KSTs, as well as the RS line itself experiencing a breakout above its recent consolidation trading range.

Chart 7

Finally, REITS, in the form of the iShares US Real Estate ETF, the IYR, has also broken out this week accompanied by positive KST action. Most impressive of all, is the relative line, which has managed to break above a 7-month down trend line. Relative momentum is also positive.

Chart 8

Good luck and good charting,
Martin J. Pring

The views expressed in this article are those of the author and do not necessarily reflect the position or opinion of Pring Turner Capital Group of Walnut Creek or its affiliates.