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Stock Market Outlook for May 12, 2017

Sell in May didn’t work so well in the first half of the 20th century.

 

Real Time Economic Calendar provided by Investing.com.

 

**NEW** As part of the ongoing process to offer new and up-to-date information regarding seasonal and technical investing, we are adding a section to the daily reports that details the stocks that are entering their period of seasonal strength, based on average historical start dates.   Stocks highlighted are for information purposes only and should not be considered as advice to purchase or to sell mentioned securities.   As always, the use of technical and fundamental analysis is encouraged in order to fine tune entry and exit points to average seasonal trends.

Stocks Entering Period of Seasonal Strength Today:

Scholastic Corporation (NASDAQ:SCHL) Seasonal Chart

 

 

The Markets

Stocks closed lower on Thursday as disappointing retail earnings ignited concerns pertaining to the strength of the consumer.  Shares of Macy’s fell 17%, dragging on the S&P Retail ETF (XRT) to the tune of 2.7%.  The XRT ETF remains in a trading range between $40 and $46, gyrating on either side of its 200-day moving average.  The industry ETF has underperformed the market over the past two years as brick-and-mortar stores struggle against the evolution to online sales.  We’ll get a better read on the state of the consumer on Friday, before the opening bell, when the Census Bureau releases its monthly tally of retail trade in the US.  The consumer represents the largest input to GDP and weakness in this area would have damaging results on the economy and equity markets.



Over the past couple of weeks, we’ve presented a number of statistics pertaining to the semi-annual rotation strategy of “Sell in May and Go Away.”  In the weaker period for the broad equity market, as gauged by the S&P 500 Index, between May 5th and October 27th, the large-cap index has averaged a gain of a mere 0.20% since 1950 with positive results recorded in 63% of the seasonally weak periods.  This compares to an average gain of 8.42% between October 27th and May 5th with positive results recorded in 81% of the timeframes.  Both results exclude returns attributed to dividends, which would add to the outcome of both scenarios.  However, while data since 1950 makes it clear what the better six-month opportunity is for equity positions within a portfolio, the period that surrounds the summer months hasn’t always been the weaker case.  Prior to 1950, the seasonal profile of the US market had a different appearance, showing that the stronger period for stocks was between May to October, on average, with the weaker period evident between October and May.  (You may note a slight variance between this chart and a study published previously on this site; due to the use of monthly data, results were shifted back one interval to more appropriately reflect the month in which the returns were generated, thereby shifting the profile.  For the purpose of our analysis, this shift doesn’t alter the final returns for the two semi-annual periods.)  Between 1870 and 1950, the US equity market gained an average of 2.03% between May and October, while the other half of the year, what we now attribute to being the period of seasonal strength for stocks, produced an average gain of 1.40%.  The summer period recorded gains in 44 of the 79 periods tested, while the winter period, between November to April, saw positive results in 41 of the periods.  This historic result can be attributed to the primarily agriculture driven economy prior to World War 1 & 2 causing equity market returns to peak around the time of the annual harvest.  Today, with the pickup in consumer spending in the fall and spring and increased manufacturing activity in the first half of the year, stocks have shown their best gains of the year between October and May, while returns during the off-season are rather lacklustre by comparison. 

When considering the semi-annual “Sell in May” strategy, one must consider that not all benchmarks are created equally.  Cyclical constituents, such as materials and industrials, have played a dominant role in dragging upon broad market benchmarks during the summer period.  A number of cyclical sectors trade lower in the May through October period following the ramp up in economic activity in the first half of the year.  With positive fundamental catalysts generally on the decline through the third quarter, investors tend to shift to less cyclically sensitive areas, such as health care, utilities, and consumer staples, which typically hold their value better in times of volatility than higher beta counterparts.  As a result, benchmarks that have greater exposure to defensive constituents or even growth areas of the economy, such as Technology, have still realized healthy returns, on average, at various points in the weak period for the broad market.  So while the average profile for the equity market over the months ahead is certainly not as favourable as the six month period that preceded it, the tendency for losses warranting a liquidation of entire equity portfolios is by no means a given.  What is more typical during this summer period, as noted in a recent report, is volatility, which those nimble enough can benefit from in both directions.

US Equity Market Performance prior to 1950
Seasonally Strong Period Seasonally Weak Period
Start End Return Start End Return
10/31/1949 4/30/1950 14.46% 4/30/1949 10/31/1949 9.00%
10/31/1948 4/30/1949 -3.34% 4/30/1948 10/31/1948 -5.33%
10/31/1947 4/30/1948 5.76% 4/30/1947 10/31/1947 6.49%
10/31/1946 4/30/1947 -2.38% 4/30/1946 10/31/1946 -21.44%
10/31/1945 4/30/1946 9.74% 4/30/1945 10/31/1945 14.98%
10/31/1944 4/30/1945 15.60% 4/30/1944 10/31/1944 5.95%
10/31/1943 4/30/1944 6.80% 4/30/1943 10/31/1943 -4.71%
10/31/1942 4/30/1943 25.55% 4/30/1942 10/31/1942 19.42%
10/31/1941 4/30/1942 -15.37% 4/30/1941 10/31/1941 -0.64%
10/31/1940 4/30/1941 -14.12% 4/30/1940 10/31/1940 3.78%
10/31/1939 4/30/1940 -16.50% 4/30/1939 10/31/1939 12.82%
10/31/1938 4/30/1939 -14.08% 4/30/1938 10/31/1938 30.96%
10/31/1937 4/30/1938 -10.89% 4/30/1937 10/31/1937 -31.08%
10/31/1936 4/30/1937 -6.39% 4/30/1936 10/31/1936 23.21%
10/31/1935 4/30/1936 8.05% 4/30/1935 10/31/1935 33.74%
10/31/1934 4/30/1935 5.98% 4/30/1934 10/31/1934 -6.22%
10/31/1933 4/30/1934 0.31% 4/30/1933 10/31/1933 10.26%
10/31/1932 4/30/1933 25.82% 4/30/1932 10/31/1932 27.95%
10/31/1931 4/30/1932 -46.97% 4/30/1931 10/31/1931 -27.49%
10/31/1930 4/30/1931 -13.78% 4/30/1930 10/31/1930 -30.58%
10/31/1929 4/30/1930 -14.47% 4/30/1929 10/31/1929 10.72%
10/31/1928 4/30/1929 17.04% 4/30/1928 10/31/1928 11.34%
10/31/1927 4/30/1928 16.31% 4/30/1927 10/31/1927 17.38%
10/31/1926 4/30/1927 9.14% 4/30/1926 10/31/1926 13.41%
10/31/1925 4/30/1926 -3.45% 4/30/1925 10/31/1925 15.66%
10/31/1924 4/30/1925 12.60% 4/30/1924 10/31/1924 7.41%
10/31/1923 4/30/1924 5.85% 4/30/1923 10/31/1923 -11.76%
10/31/1922 4/30/1923 -1.73% 4/30/1922 10/31/1922 12.79%
10/31/1921 4/30/1922 22.54% 4/30/1921 10/31/1921 -3.04%
10/31/1920 4/30/1921 -12.31% 4/30/1920 10/31/1920 -8.37%
10/31/1919 4/30/1920 -9.19% 4/30/1919 10/31/1919 12.87%
10/31/1918 4/30/1919 6.74% 4/30/1918 10/31/1918 9.02%
10/31/1917 4/30/1918 -6.12% 4/30/1917 10/31/1917 -16.25%
10/31/1916 4/30/1917 -8.12% 4/30/1916 10/31/1916 10.03%
10/31/1915 4/30/1916 -0.77% 4/30/1915 10/31/1915 12.29%
10/31/1914 4/30/1915 5.99% 4/30/1914 10/31/1914 -5.42%
10/31/1913 4/30/1914 -1.69% 4/30/1913 10/31/1913 -6.03%
10/31/1912 4/30/1913 -10.67% 4/30/1912 10/31/1912 2.61%
10/31/1911 4/30/1912 9.98% 4/30/1911 10/31/1911 -6.03%
10/31/1910 4/30/1911 -0.43% 4/30/1910 10/31/1910 -4.12%
10/31/1909 4/30/1910 -4.99% 4/30/1909 10/31/1909 9.76%
10/31/1908 4/30/1909 12.70% 4/30/1908 10/31/1908 14.23%
10/31/1907 4/30/1908 9.04% 4/30/1907 10/31/1907 -20.86%
10/31/1906 4/30/1907 -13.77% 4/30/1906 10/31/1906 3.18%
10/31/1905 4/30/1906 0.75% 4/30/1905 10/31/1905 4.70%
10/31/1904 4/30/1905 15.35% 4/30/1904 10/31/1904 16.72%
10/31/1903 4/30/1904 6.07% 4/30/1903 10/31/1903 -19.23%
10/31/1902 4/30/1903 -9.57% 4/30/1902 10/31/1902 1.06%
10/31/1901 4/30/1902 7.21% 4/30/1901 10/31/1901 -2.83%
10/31/1900 4/30/1901 35.44% 4/30/1900 10/31/1900 -5.21%
10/31/1899 4/30/1900 0.00% 4/30/1899 10/31/1899 -2.16%
10/31/1898 4/30/1899 25.83% 4/30/1898 10/31/1898 12.69%
10/31/1897 4/30/1898 -5.19% 4/30/1897 10/31/1897 18.72%
10/31/1896 4/30/1897 -0.98% 4/30/1896 10/31/1896 -7.24%
10/31/1895 4/30/1896 -6.95% 4/30/1895 10/31/1895 8.70%
10/31/1894 4/30/1895 0.69% 4/30/1894 10/31/1894 -5.03%
10/31/1893 4/30/1894 1.56% 4/30/1893 10/31/1893 -15.25%
10/31/1892 4/30/1893 -5.01% 4/30/1892 10/31/1892 0.36%
10/31/1891 4/30/1892 4.50% 4/30/1891 10/31/1891 7.24%
10/31/1890 4/30/1891 -2.17% 4/30/1890 10/31/1890 -5.75%
10/31/1889 4/30/1890 -0.19% 4/30/1889 10/31/1889 4.25%
10/31/1888 4/30/1889 -3.18% 4/30/1888 10/31/1888 4.90%
10/31/1887 4/30/1888 -1.92% 4/30/1887 10/31/1887 -10.34%
10/31/1886 4/30/1887 2.65% 4/30/1886 10/31/1886 10.35%
10/31/1885 4/30/1886 4.07% 4/30/1885 10/31/1885 12.59%
10/31/1884 4/30/1885 -1.58% 4/30/1884 10/31/1884 -12.25%
10/31/1883 4/30/1884 -5.95% 4/30/1883 10/31/1883 -8.35%
10/31/1882 4/30/1883 -3.29% 4/30/1882 10/31/1882 5.02%
10/31/1881 4/30/1882 -6.02% 4/30/1881 10/31/1881 -1.13%
10/31/1880 4/30/1881 16.70% 4/30/1880 10/31/1880 2.90%
10/31/1879 4/30/1880 10.68% 4/30/1879 10/31/1879 24.14%
10/31/1878 4/30/1879 8.33% 4/30/1878 10/31/1878 4.50%
10/31/1877 4/30/1878 0.60% 4/30/1877 10/31/1877 12.59%
10/31/1876 4/30/1877 -19.89% 4/30/1876 10/31/1876 -15.44%
10/31/1875 4/30/1876 0.93% 4/30/1875 10/31/1875 -7.53%
10/31/1874 4/30/1875 2.65% 4/30/1874 10/31/1874 -1.52%
10/31/1873 4/30/1874 9.79% 4/30/1873 10/31/1873 -16.87%
10/31/1872 4/30/1873 1.41% 4/30/1872 10/31/1872 -4.05%
10/31/1871 4/30/1872 12.85% 4/30/1871 10/31/1871 -3.16%
Average: 1.40% Average: 2.03%
% Positive: 51.90% % Positive: 55.70%

 

Touching briefly on the economic data released on Thursday, initial jobless claims continue to trend inline with the seasonal average, ticking mildly higher to start the month of May.  The level of claims typically hits its low for the year in the month ahead as hiring ramps up for the summer season.  The report continues to remain conducive for further gains in employment in the months ahead, allowing the Fed to remain on track with its tightening cycle.

Sentiment on Thursday, as gauged by the put-call ratio, ended bullish at 0.91.

 

 

 

Seasonal charts of companies reporting earnings today:

 

 

S&P 500 Index

 

 

TSE Composite