Forget “Sell in May” … It’s Time to Make Hay

By TradeSmith Research Team

I hope you don’t do it, but if you’re going to, time is running out.

Chances are you’ve heard the old adage …

Sell in May and go away.

I’m not a huge fan of this market witticism anyway – even with its poetic rhyming.

But I really don’t like it right now.

This is a time to be buying – not selling.

I’m a data guy, and I’ll grant you that the S&P 500 tends to perform better from October through May – and then turns choppy in the summer and through to the early fall.

You can see this in the S&P 500’s average monthly returns since January 1990:

But is that a reason to dump your stocks?


You can do much better in high-quality stocks, the kind of stocks my Quantum Edge system identifies with superior fundamentals, strong technicals, and Big Money inflows. These are the stocks with the highest Quantum Score that have outperformed the market 7-to-1over the last three-plus decades.

You don’t get that kind of outperformance by taking six months of the year off.

And besides, the biggest cloud hanging over stocks has started to break up. That’s going to add some oomph to the months ahead and generate some buying opportunities you don’t want to miss…

The Most Important Data Right Now

The Federal Reserve has raised interest rates 10 times over the last 14 months. Investors accepted those rate hikes as necessary to tame inflation. But they now want to know when the central bankers will stop their rate campaign – before this hawkishness goes too far and tips us into recession.

It was pretty much a given that the Fed would raise interest rates by a quarter of a percentage point at its last meeting. So, everyone was more interested in whether this was the last increase.

If you followed the Fed at all, you know that Chair Jerome Powell would never come right out and say that. But in his own “Fedspeak” way, he kind of did.

I read every word of the policy statement and listened to Powell’s press conference. So, I can say with confidence: The Fed is pretty much done.

The whole point of raising rates was to slow – or knock out – inflation. And inflation is falling hard.

This means future rate decisions will be based on data. That’s music to my ears. Powell himself said the Fed will go “meeting by meeting” as it evaluates future rate actions.

Believe it or not, some folks already anticipate a rate cut. CME’s FedWatch Tool shows that investors assign a 25% chance the Fed will lower rates at its late-July meeting.

I think that’s too optimistic, but we also don’t need rate cuts to jumpstart the market. History shows that a pause is good enough to get stocks moving.

I pulled data on how the S&P 500 performs three months and again six months after the final rate hike in a tightening cycle. This is the most important data right now, and fortunately, the takeaway is highly positive… and basically squashes any notion to “sell in May.”

Notice, too, that the five most recent times this has happened are all positive. More recent samples carry a heavier weighting in data analysis, and that 6% average three-month gain and 13% average six-month gain the last five times are more bullish signs.

More Reasons to Buy

The end of rate hikes may be the biggest bullish catalyst right now, but it’s not the only one.

We’re just wrapping up earnings reporting season, and the apocalypse feared by many never materialized. According to FactSet’s latest data, 78% of S&P 500 companies have beaten earnings estimates with 75% beating sales estimates.

The one “problem” has been forward guidance. A lot of companies, even if they beat last quarter, are cautious about what’s to come. Which shouldn’t be surprising at all. The economy is slowing. We all know that. It had to if the Fed was going to win the war on inflation.

Honestly, it’s just smart for companies to be conservative in their forecasts. Fade the numbers a bit to temper expectations, and then set yourself up for a nice beat in future quarters. I think that’s happened a lot, and as long as you stay focused on fundamentally superior companies, you’ll be fine.

And then there’s the persistently strong jobs market. Some economists are a bit baffled because usually a slowing economy and higher rates would lead to fewer jobs. But the economy added 253,000 jobs in April – far exceeding estimates for 180,000.

Consumers also continue to spend for the most part, even if they adjust here and there for higher prices. And if that sounds ho-hum, consider that consumers are two-thirds of the $23 trillion U.S. economy is consumer spending.

Now’s the Time

Should rates level off as expected, inflation continue to abate, and earnings continue to be better than expected, I expect the market to naturally strengthen. Then, as investors fear the train is leaving the station, the huge cash stash will hop off the sidelines and begin to chase a hot stock market.

Besides, Big Money never really stops flowing. It can ebb at times, but with the vast majority of money managers being “long only,” they need to be invested in stocks. If they simply sit in cash, they can’t charge fees, so they’re taking money out of their own pocket as well.

Our one of the big advantages of our Quantum Edge system is spotting where that Big Money is going – in the market, in sectors, and in individual stocks. Combine that with our focus on strong fundamentals and technicals, and you have the recipe for making money even if the market wobbles a while longer… and especially as it strengthens in the back half of the year.

I’m afraid that those who “sell in May” – and all that cash just sitting on the sidelines – will miss out on some prime moneymaking opportunities in the months ahead.

Talk soon,

Jason Bodner
Editor, Jason Bodner’s Power Trends

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