We often hear the stock market adage ‘sell in May and go away,’ but what does it really mean, and where did it originate? As May 2024 draws to a close, we’re going to explore the origins of this well-known Wall Street maxim. So first, where does ‘sell in May and go away’ come from?
History
Well, it originates from New York, where Wall Street is located. The school season ends in May, and therefore Wall Street executives start their vacations in June. Historically, fund managers would lighten up their positions before heading out for summer vacation with their kids and families. The school season in New York resumes the second week of September, right after Labor Day. Thus, summer is defined in New York as the period after Memorial Day weekend, which marks the start of summer, and it ends on Labor Day, one week into September. This definition of summer vacation is not applicable to the majority of the United States; it only defines summer vacation in the Northeast. However, the Northeast is the financial powerhouse of the United States, meaning that the majority of wealth management funds, hedge funds, and family offices are all located there. This gives rise to the maxim ‘sell in May and go away.’
Tax Day and IRA Contributions
Above is a chart of the $QQQ which represents the Nasdaq 100 technology index, but added to the top section of the chart you can see that the MACD histogram is indicating that momentum is slowing down. The green fast signal line is about to cross back over the slower red signal line. The CCI, which has been added to the bottom section of the chart, has 4 red overbought indicators showing that a possible reversal is near.
There is also a technical reason why this pattern tends to work: April is tax month, with Tax Day falling on April 15. This is the deadline for making contributions for 2023. Those who leave their IRA contributions to the last minute rush to deposit money into their IRAs just before April 15, which gives the stock market a nice boost throughout April and into May. Even though the money has been contributed to their IRAs, investors may not deploy it immediately, meaning they may not buy stocks or ETFs right away. This continues to give an upward bias to the market right into the end of May, which is when the ‘sell in May and go away’ trend is supposed to start, after the Memorial Day weekend.
Why is 2024 Different?
Let’s examine what’s happening this year: we had a significant sell-off in March, and then the market surged to new highs, even surpassing the important benchmarks of 40,000 for the Dow Jones and 17,000 for the NASDAQ. This surge is occurring amid speculation that the Federal Reserve might be inclined to lower interest rates sooner rather than later. However, the real buying pressure is coming from the deployment of last-minute IRA contributions. Additionally, this year, we have other interesting trends coming into play, which will most likely increase volatility. We are now entering the final months of an election year. We would expect that this year will be extraordinarily volatile, especially since, as this is being written, Donald Trump, one of the two candidates, is sitting in a courthouse in New York City. These are unprecedented circumstances for a U.S. presidential election, making election volatility all the more likely.
The chart above of the $SPY ETF is even more bearish than the $QQQ that we already reviewed above. However, the CCI on the bottom panel of the chart is oversold already, meaning that $SPY might be ready to bounce in the short term, even though the MACD on the top section of the chart is showing a roll over to more bearish action in the longer term. Both the $QQQ and the $SPY indicate that a bearish market correction should be expected in June. The cause of the correction could be profit taking, more speculation over the move of the Federal Reserve or possibly a verdict in Donald Trump’s criminal trial. The markets are setting up for a correction of some type on the charts, but the catalyst that will trigger it still remains to be seen.
$NVDA Bearing its Weight
Finally, we have included a chart of $NVDA above. The MACD, the Bollinger Bands as well as the CCI are all at extremely overbought readings. This is very significant because $NVDA is most likely the strongest stock in the markets. Its good earnings report and announcement of a stock split helped propel the markets to new highs. This is important because this key stock has been holding up the markets. However, if $NVDA starts to fall that could trigger further selling in the indexes that it is listed on.
In conclusion, ‘Sell in May and Go Away’ might not be the best trend to play every year, but this year prior to a hotly contested election and simply because markets are up near all time highs, it might be a great time for traders and investors alike to take some profits off the table. So this May we will leave you with another well known wall street adage “You won’t go broke taking your profits!” Until next month, trade well.
Written by Michael DiGioia, Director of Education
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