Historically speaking, November through April is the strongest six months for market performance, while the six months from May through October are seasonally weaker. Each year, as we close out the month of April, investors beg the question, “Should I sell in May and go away”. This old stock market adage may hint at the threat of the summer doldrums, but there is no end all be all. Nor should history be regarded as a sheep destined for the cloning lab.

For the Dow Jones Industrial Average over the past 71 years, the “worst six months” (May-Oct) have ended in the green 40 times and down 31 times with an average return of -0.48% (not including dividends). In contrast, the “best six months” (Nov-Apr) have been up 61 times and down 10 times with an average return of 8.96% (not including dividends). While this data may seem compelling, there is more to it than meets the eye. Of those 40 years when the worst six months ended positive, six yielded returns in excess of 10%, and nineteen saw gains of 5% or more. Additionally, of the ten years the best six months closed in the red, five witnessed losses in excess of 6%.

Sure, over a large enough data set a compelling trend can be identified, however markets are subject to wide range of exogenous variables, many of which don’t care much about the date on the calendar. For this reason, before rushing to cast doubt on the current market conditions we should instead seek to identify what the weight of the evidence currently favors while remaining open to change if/when that weight happens to shift.

Currently, our indicators suggest that markets remain stable and have some compelling opportunity for additional upside. However, this upside should not be expected to be long lasting and a period of selling is likely on the horizon for late May. At a minimum, we should expect a period of consolidation in domestic equity, but at this time we do not see an indication of a significant selloff or a pending bearish reversal across the major domestic equity indices.

In the early part of the year we suggested that this selling or consolidation was probable toward the end of April or in early May, however, indicators have improved suggesting we can stretch our timeline. We highlight this fact to reiterate our commitment to the data, the evidence, and to our discipline.

Our analysis currently suggests a critical support range for the Nasdaq 100 (NDX) between $13,312 and $13,708. A breakdown below this range does not necessarily suggest a breakdown in domestic equity, however it will all but confirm that market leadership has likely changed hands from growth to value.

In regards to the S&P 500 (SPX), we believe a critical support exists between $3,730 and $3,727. A close below this support would indicate greater systemic weakness in domestic equities and will likely warrant a reduction in equity exposure in our portfolios. But as they say, “only time will tell”. Until then, we will remain vigilant open-minded.

Sincerely,

Casey V. Fulp, CFP®