While it is true the next six months has been the worst on average for the S&P going back to 1950 (1.48%), it usually isn't as simple as "Sell in May and go away". As with all statistical analysis you have to look deeper into the data and not take it at face value. We believe you have to take into context where the market is within the overall cycle. We believe US equity markets continue to reside in a secular bull market. We don't think it is prudent to sell your position just because the statistical data says the S&P is about to embark on the worst six-month stretch. Yet, even within secular bull markets there are times to be more cautious than others. Is now the time to trim lagging positions and raise some cash for potentially better entries?
There are certainly plenty of issues to make us more cautious as we enter into the most challenging period of the year. Valuations are high but that alone doesn't warrant immediate concern. Most economic numbers remain robust but one area of weakness has been housing numbers the last few months. Right now the market is stuck in a headline driven market dependent on any tweet or story regarding the trade deal. This is causing plenty of noise and volatility. The statistical data also creates a mixed bag of results. On one hand, the S&P's 19 week rate-of-change is at 21%. This has been bullish going out 6-12 months as strength begets strength. However, in the context of the current market, the S&P has been up 4 months in a row and the strongest start to the year in 32 years. According to Ryan Detrick the markets don't have a good track record of following up on a rally of the size. "There are four other years since World War II that the S&P was up at least 15% to kick off the year like we’re going to be this year. Three of those years are virtually flat during these worst six months of the year, the other was 1987 when we lost about 13%. It does seem if you have some really good gains that kick off a year, it can be kind of front-ended and you can have potentially a little bit worse returns over these worst six months of the year, said Detrick. Fundamentally things still look good ... so maybe we can get a little bit of consolidation and a well-deserved correction after a really good bounce to kick off this year.”
Last year was a bit of anomaly as the S&P experience two corrections directly off new highs. With the S&P making new highs in May we believe this is supportive of continued strength. Data from UBS confirms this. "Since 1950, after stocks set an all-time high in the S&P, their subsequent six-month return has been 4.7%. The data also show that large pullbacks have been less likely after markets have put in records. The market has just 11% of the time declined by more than 5% over the six months following an all-time high, compared with 18% of the time otherwise.”
Markets are made by various opinions about price on a daily basis. If we take a step back and look at the data presented there are cases to be made for the bulls and bears. However, we prefer to look at the data relative to the cycle. The next six months is a more challenging period but that doesn't mean we need to be bearish. We do believe the next four months won't be as easy as the previous four considering the magnitude of the rally. Yet, we remain bullish maintaining our core positions but looking for better entries as we enter the seasonably slow part of the calendar as we think the back half of the year can finish strong.
