Just to be clear, I absolutely despise market clichés like “sell in May and go away.”
I’m fully aware that a lot of these have some strategic merit, but I cannot imagine being the guy/gal who has to explain a fuckup by admitting that a trade was based on one of the myriad old market adages.
Something like this: “Well, the thing is, I was reading the Farmer’s Almanac, and I thought…”
But it’s May (or at least I think it is and in a post-Balvenie world, I’m pretty good at identifying what month it is), which means they’ll be no shortage of debate about the relative merits of “sell in May and go away”.
Bloomberg’s Kyoungwha Kim has some thoughts on Monday. “Equities have spent three months consolidating February’s sharp correction [as] fears of accelerated Fed rate increases and a potential trade war between the U.S. and China have capped any gains,” she notes, before suggesting that Friday’s payrolls and AHE miss have “put to bed” speculation of an overly aggressive Fed.
I’m not at all sure I concur with that latter assessment, but that’s ok.
Meanwhile, she also acknowledges that the Steve Mnuchin-led not-Dream-Team that Trump sent to China last week was indeed sent right back to Washington with nothing more than a kind of “don’t call us, we’ll call you” message from Xi on trade. That, apparently, can be spun as a positive. Here’s Kim:
The two-day China-U.S. negotiations broke up without a whiff of a deal so trade tensions remain a risk. But there seems to be relief that there was a lack of confrontation at the meeting and that dialogue will continue. Importantly, the can has been kicked down the road, giving stocks some breathing room to rally.
Again, that’s a pretty generous interpretation, but I suppose it’s worth considering.
Both of those points, to the extent they’re some semblance of true, suggest that concerns of a aggressive Fed tightening and trade escalations will simply resurface later, perhaps making anyone who bought in May regret it pretty much immediately.
Meanwhile, Marko Kolanovic’s latest note (out last week and immediately followed by all manner of attempts to impart meaning from the peanut gallery) has a section on “sell in May and go away” which we’ll excerpt below without further comment because while I felt compelled to do at least one post on this seasonal cliché, it’s out of my system now.
In this (so far, chaotic) year – we also witnessed significant US equity fund outflows during the period supposed to be the strongest seasonal part of the year. If the “upside down” market patterns continue, the “sell in May and go away” prescription (that reflects a reversion of inflows early in the year) may turn into “buy in May” this year. Trends that support this outcome include the relatively low equity exposure of systematic and discretionary investors, and the Hedge Fund equity beta is estimated to be below historical averages (at ~44th percentile). Systematic investors thoroughly de-risked by selling ~$300bn of equities this year. If volatility can stay contained and the market can make modest gains, systematic investors would re-risk. For instance, three-month price momentum is more likely to turn positive in early May (three months since the February crash), which could result in buying of up to ~$50bn by trend followers. Volatility-sensitive investors would be slower to re-risk at ~$10bn per week, but this could accelerate if volatility declines more substantially. In addition, buybacks are expected to pick up activity after individual companies announce earnings, and may add up to ~$20bn of inflows per week at its peak. We often hear from clients ‘there is no one to buy equities’ and the above summary argues that is not correct.