Sell in May and Go Away is a popular stock market adage referring to its historical underperformance between May and October. However, during this period, too, the market is known to stage a rally that the Stock Trader’s Almanac calls the “summer rally,” albeit a short one and the weakest of all four seasons, within the total market decline over these months.

The summer rally typically lasts from the low of May/June to the high of Q3. Since 1964, the Dow Jones Industrial Average ($DJIA) has gained an average of 9.0% in a summer rally compared to the average gain of 11.0% in a winter rally, 12.7% in a spring rally, and 11.4% in a fall Rally. Stock Market Almanac’s research also jives well with Bank of America’s recent note to its clients. The bank found the June to August period to be the second-strongest three-month period of the year since 1928, with the S&P 500 rising 65% of the time for all years and 75% if we consider its performance only in presidential election years.

Risk With “Sell in May and Go Away”

The trouble with blindly following the “sell in May and go away” axiom to make an investing decision is that its track record of “historical underperformance” only states a probability, which could either come out to be true or false. Some years the market does not decline at all between May and October, which is when the “Best Six Months” switching strategy starts, some years it starts the decline earlier or later, and some years it just gives a head fake. To make better-informed investing decisions one should analyze the overall market structure using current economic data and technical indicators.

Last Year Did Not Follow the Classic Pattern

Fig. 1. – S&P 500 (Daily)

The “sell in May and go away” and the “summer rally” in 2023 did not adhere to the classic patterns (see Fig. 1). The previous year’s “Best Six Months” move did start in October 2022, but ended early in February 2023, after witnessing a retracement for a few weeks in December. The intraday reversal candle on October 13, 2022, was a good signal for the start of the strategy but the ending was a little befuddling. The end coincided with a double top formed at the strong resistance of a down-gap created in August 2022. The S&P 500’s subsequent decline from February 2023 to March 2023 was meaningful as was its advance from the March lows, which stalled in April, and then the index moved sideways for the next couple of months before breaking out in June.

Arguably, the advance of the S&P 500 from June 2023 to July 2023 could be called a summer rally, though some may say it is stretching without the accompanying “sell in May and go away” signal. The up move of the rally started from the lows of May 2023 and gained steam after breaking out in June before turning down in July 2023 coinciding with the Q3 high.

Previous Rally Peaked in March

The decline from July 27, 2023, lasted until October 27, 2023, when another one-day reversal candle heralded the start of the “Best Six Month” strategy. This time the move up was quite noticeable including a four-week pennant midway of the rally in December 2023. The “Best Six Month” strategy ended in March, a month before its classic end time. The end of the move was signaled by a noticeable Bearish Divergence on RSI, which coincided with a daily double top on March 28, 2024 (see Fig. 1).

Is It a Summer Rally or a Spring Rally?

The S&P 500, along with other major US indices, formed a one-day reversal pattern on April 19, 2024, near a swing low, which was followed by a brief throwback a couple of weeks later (see Fig. 1). The market has been in an upswing since May 1, 2024, and is breaking above the March 2024 highs. Whether this rally will qualify as a spring rally, making it a part of the “Best Six Months,” or a summer rally is probably a matter of contention but there is no doubt that its meaning.

Commodities Rising, Bonds Falling

Fig. 2 – Intermarket

The dollar index ($USD) has been advancing since the end of 2023 (see the bottom panel of Fig. 2); however, it has moved within a range between 105.05 and 99.22 since November 2022.

The Reuters/Jefferies CRB index ($CRB), too, has been rising since December and is also at the upper bound of the trading range since October 2022 (see the third panel of Fig. 2).

The 30-year US Treasury bonds ($USB) have resumed their downtrend that started in March 2020 after a brief bounce from October to December of 2023 (see the second panel of Fig. 2). The US equities are on the rise (see the first panel of Fig. 1) as discussed earlier.

Emerging Markets Picking Up Steam

Fig. 3. – Equities

Equities around the world are rising though with varying degrees of strength. The emerging markets ($EEM), the developed market ($EFA), and the USA ($SPY) started their uptrend last October (see the first three panels of Fig. 3).

The $EFA underperformed the $SPY from January 2023 until May 2023. Since then, both are essentially keeping pace with each other (the fourth panel of Fig. 3).

The emerging markets mostly underperformed the developed markets in 2023. However, since March 2024, they have outperformed the $SPY and $EFA (see the last panel of Fig. 3).

If the equity ETFs break above their respective resistance levels, then their uptrends will continue. The resistance level for $SPY for 524.61 and its potential targets are 538.00 and 565.00, which are approximately 2.8% and 7.9% above its current price.

The resistance for $EEM is 42.53 and the potential targets are 45.35 and 47.50, which are 4.3% and 9.3% above the current price. $EFA is above its recent resistance of 80.06. The potential targets for it are 84.77 and 90.26, which are 3.8^ and 10.5% above its current price.

Downward Pressure on Yields

Fig. 4 – Fed Funds Rate and CPI

Fig. 5: 30-Year US Treasury Yields

The inflation is trending down since peaking in September 2022 (see Fig. 4) and the trend is in no danger of reversing. The Federal Funds Rate lifted off from the zero-bounce in March 2022 and has been constant since August 2023. During this time the real rates or the effective Fed Fund rate have moved up from -6.37% to +1.75%, with the current trend indicating that the effective rates will overshoot the CPI without the Federal Reserve’s intervention.

The market is taking note of falling inflation and the US Treasury yields seem to be stagnating. The 30-year US Treasury Yield has declined for four weeks and is approaching a critical support level near 4.425 (see Fig. 5). If it declines below that level then the uptrend since December 2023, will be broken.

Fig. 6: Us 30-Year Bonds

The chart of the 30-year US Treasury Bond is the mirror image of the yield chart and provides a bit more insight (see Fig. 6). The bond future is making a down-sloping flag – a bullish pattern – a break above 120.15, the high of April 2024, will create upside targets of 123.33 and 130.17. The corresponding numbers for 30-year yields would be – a break below 4.30 will create the downside targets of 3.94 and 3.50.

Utilities, Financials, and Technolgy Are the Stronger Sectors

Fig. 7 – Relative Sector Performance

Fig. 8 – Relative Strengths SPDR

Over the past month, Utilities ($XLU), Consumer Staples ($XPL, Financials ($XLF), Healthcare ($XLV), and Real Estate ($XLRE) sectors have outperformed the broader index, S&P 500 (see Fig. 7). Observing the current trend, Utilities, Technology, Financials, Real Estate, and Consumer Staples stand out (see Fig. 8).

Utilities sector continues to outperform the S&P 500, telling us that the market is adopting a defensive posture. In April, Technology reversed its four-month underperformance whereas Financials, reversed its outperformance. Real Estate changed course in April too after more than a year’s underperformance. Consumer Staples has been matching the performance of the S&P 500 since February, also, revealing market’s angst due to the uncertainty of the Fed’s rate cuts, election, and inflation.