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Sell in June Before the Swoon

On average, the coming month is the third worst of the year


June’s trading is right around the corner, meaning that it’s time to take stock of the monthly seasonality trends. As we’ve done in the past, let’s look at the historical performance for each month since such data can affect traders’ planning and moves.

First, though, a review of May is in order. The old saying goes “Sell in May and Go Away” — referring to the strategy of walking away from the market during the traditionally volatile summer months.

Of course, historical data shows (below) that May is usually a positive month returning an average of 0.9%. Deeper within the numbers lies the fact that the positive months average returns of 3.2%. Month-to-date, the S&P 500 is up 3.75%, so we’re a little better than the average.

That raises an obvious question: What’s with “Sell in May?”

The argument that we’ll hear, with good reason, is that the “Sell in May” rule applies to selling at the end of May, leading us to look at June’s averages. Since 1990, the S&P 500 averages a monthly return of -0.5% — the third worst monthly average of the year. These numbers suggest that the poor summer months really start with the kickoff of June’s trading.

That in mind, let’s look outside of the averages to today’s market. The last two weeks have provided some fodder for the bears as the FOMC is now passing hints in between the lines that the much-anticipated “tapering” could begin ahead of the market’s schedule.

The hints have caused a surge in yields and some volatility among stocks as investors deal with the reality that interest rates won’t be near zero forever.

The S&P 500 is now recovering from an overbought situation it achieved May 22 at the same time that the chart is suggesting a short-term top in stocks may be forming. The short-term pattern of lower highs and lower lows for the index suggests that stocks are slipping; sellers are taking stocks down a bit more than sellers are building them back up. Though still early in the pattern, the lower lows should have the traders in the mix adding some protective positions to their portfolios.


Outside of raising cash by selling profitable positions, some traders may choose to use alternative positions like the ProShares Short S&P500 (SH) or more aggressive ProShares UltraShort S&P500 (SDS) to hedge a potential pullback in stocks. Both of these exchange-traded funds are managed to appreciate in value when the S&P 500 declines.

Outside of the hedged positions, keep your eyes on dividend-yielding investments like REITs and utilities. These stocks have pulled back lately but will garner more attention as trends in the 10-year yields cross above the 2% level on a more permanent basis.

Betting against this bull has been a hard pill to swallow for the first five months, but the bull’s short-term memory could quickly revert back to a bearish posture on the slightest whiff of real selling pressure — something that could come sooner than later if the real seasonality trends continue to play out on this market.

As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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