by Jon Markman | May 8, 2014 9:40 am
As you know from the cute but reductive phrase “sell in May and go away,” there is something about the fifth month of the year that does not tend to agree with the stocks.
Not only does the month begin what is historically the worst six-month stretch of the year for stocks, but the market usually gets off to a bad start right away. Analysts at Bespoke Investment Group report that over the last 10 years, the S&P 500 has averaged a loss of 0.9% from May 5 to May 19, with positive returns just half of the time. The odds tend to be even worse in even years like 2014, as the S&P 500 has only been up during this period on an even year once in the last 10 years. The even years host general elections, which may help account for this unbalanced record.
Another notable aspect of this month, according to Bespoke, is that when the S&P 500 has been down, they have really been doozies, with losses of -2.9% to -5.4%.
As for sectors, there tends not to be many places to hide. Bespoke notes that the only sector that has averaged a profit in the upcoming two-week period in the last 10 years is consumer staples stocks, with a 0.4% gain. Along with telecom services, it is the only one that has been up more than half of the time. As for the downside, the worst have been financials, materials, energy and consumer discretionary, as you can see in Bespoke’s chart below. While the loss in utilities has been mild, they have been down seven of the past 10 years.
Of course, this does not mean that individual stocks have not regularly put in good performances in this period. The aerospace stocks, which I have recommended, tend to have good records in the coming month. However, according to Bespoke research, only four stocks — Vertex Pharma (VRTX), Monster Beverage (MNST), Genworth (GNW) and Fifth Third Bancorp (FITB) — have averaged gains of more than 5%. Meat processor Hormel (HRL) has been one of the most consistent, with gains in nine of the past 10 years.
As for the downside, well, there is a lot to choose from. Leading the list of the most consistent losers are Cliffs Natural Resources (CLF), down an average of 6% for a loss 60% of the time, followed by CarMax (KMX) and PulteGroup (PHM).
I actually check the seasonality of all of my selections, along with their value. Even though I am making short-term picks on stocks, I try to make sure that they are relatively cheap and have positive seasonals in the upcoming two to four weeks. I use the excellent service Seasonalysis.com for the latter.
I find seasonal analysis to be very helpful, as there are definitely calendar-oriented patterns in stocks that cannot be explained away by straightforward fundamental or technical analysis. But, at the same time, history is not destiny, and anything can happen in any given month despite its past record.
But one seasonal stock I recommend going long as the summer approaches is O’Reilly Automotive (ORLY). It’s a $15.5 billion retailer of after-market auto parts.
The shares have pulled back since a moonshot higher in February. And, in fact, ORLY slipped 0.7% Wednesday as the shares continue to consolidate around last week’s levels, but it is most likely just coiling up again for a renewed advance. I believe they are now in the process of preparing for a road trip back toward the highs and beyond.
Buy ORLY up to $148.50. Then, set up to sell the position and take profits at the target of $154. Also, use a stop loss to sell if ORLY trades below at $139.75, good after 11 a.m. ET only.
Jon Markman operates the investment firm Markman Capital Insights. He also offers a daily trading advisory service, Trader’s Advantage, and CounterPoint Options, a service that helps individual traders make steady, consistent profits with volatility-related instruments.
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