May 18, 2018 / 6:26 PM / 10 months ago

Wall St Week Ahead-Wall Street's 'Sell in May' could be fading away

    NEW YORK, May 17 (Reuters) - "Sell in May and go away,"
arguably the most well-worn axiom on Wall Street, has proven to
be shrewd advice during previous midterm election years. 
    Though the exact origins of the phrase are a bit murky, up
until recently, stocks had underperformed in the six-month
period starting in May, which coincides with vacation for many
traders between the Memorial Day and Labor Day holidays.   
    But this year, investors may be better served by eschewing
the adage as stocks look positioned to buck that trend, with
corporate profits coming off a banner quarter and as the U.S.
economy continues to gain traction. 
    According to the Stock Trader's Almanac, the Dow Jones
Industrial Average        has lost 64.71 points from May through
October since 1950 versus a gain of 20,790.89 for the November
through April months. Over the same time frame, the S&P       
has gained 264.31 points during the May-October period, compared
with a gain of 2,420.72 points during the other six months.
    While stocks have risen in the November through April
period, volatility has also increased. After hitting a record
high on Jan. 26, the S&P dropped more than 10 percent to bottom
out on Feb. 8 at 2,581 and tested the low again in late March. 
The index now sits about 5.5 percent below the January high. 
    "I don’t think it is going to work this year," said David
Joy, chief market strategist at Ameriprise Financial in Boston. 
    "The economy is strong, earnings are good, the market has
already sold off a little bit."
    This year, May is off to a strong start, with both the Dow
and S&P on track for their best performance in the month since
    Midterm years have proven to be particularly troublesome,
however, according to data from LPL Research. 
    Elections for the U.S. House of Representatives and Senate
are set to take place in November. Historically, the party in
power loses seats after a new president's election and the
Republican party currently holds a majority in both the Senate
and House of Representatives. 
    Since 1950, midterm years have only yielded an average gain
of 0.1 percent on the S&P in the May through October period,
with the index also suffering an average peak-to-trough pullback
of 14.7 percent, the largest of the four years in the cycle. 
    "Clearly midterm elections are a headwind and a concern but
there are others as well," said Terry Sandven, senior equity
strategist at U.S. Bank Wealth Management in Minneapolis. 
    "The difficulty of investing is on the rise, that is largely
a factor of inflationary pressures becoming more prevalent and
interest rates on the cusp of a regime change." 
    Yields on the benchmark 10-year U.S. Treasury note
            touched a high of 3.128 percent on Friday, their
highest level since July 2011 and many analysts expect them to
climb towards 3.25 percent.              
    As for selling in May, the last time the month was negative
for both the Dow and the S&P was 2012. In the five years since,
the S&P has climbed in the May through October period four
times, with the only decline being a 0.3 percent dip in 2015. 
    Another reason for optimism this year, according to LPL, has
been the performance of the S&P 500 over the prior six months
and its position relative to the index's 200-day moving average,
a technical indicator. 
    Since 1950, when the S&P has entered the "sell in May"
period above its 200-day moving average after notching gains in
the prior six months, the benchmark index has climbed about 3.3
percent, with gains 70.2 percent of the time. 
    Perhaps even more telling for stocks is during midterm
years; the S&P has climbed an average of 5.5 percent, with gains
about two-thirds of the time when those conditions are met. 
    For 2017-2018, the S&P rose 2.8 percent in the November
though April period while closing out the period nearly 40
points above its 200-day moving average. 
    "That is not even getting into the positive fundamental
backdrop that is still in place with the corporate earnings
strong, the overall fiscal policy which is still tax reform and
potential infrastructure spending and deregulation," said Ryan
Detrick, senior market strategist at LPL Financial in Charlotte,
North Carolina.
    "In these next six months we would be buyers of any weakness
and wouldn’t be shocked at all if we bucked the 'sell in May and
go away' trend for the sixth year out of the last seven." 

 (Reporting by Chuck Mikolajczak; Editing by Alden Bentley and
Bernadette Baum)
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