Mid-Month Update: Selling in May Persists, Prepare For NASDAQ MACD Sell Signal
By: Jeffrey Hirsch
May 17, 2016
The Dow Jones Industrials and S&P 500 indexes hit their 2016 highs on 4-20 and since have struggled to get higher. There are many factors causing the market to fail to gain any traction, but let’s face it, folks have been selling in May. Even major Wall Street players are selling in May. 
It was reported yesterday that the analyst team at Goldman Sach, led by Chief U.S. Equity Strategist David Kostin stated, “Unbalanced distribution of upside/downside risks suggests ‘sell in May’ or buy protection.” The folks at Goldman are also tracking the presidential cycle. They note that everyone is preoccupied with the electoral campaigns, which is distracting investors from the market and that “History shows that during a typical presidential election year, the S&P 500 index remains relatively range-bound until November.
Earlier this month Guggenheim’s Scott Minerd told Maria Bartiromo on Fox Business that “statistically it’s been demonstrated that [sell in May] actually works.” And he went on to say, “given what we have on the horizon…it would be a good time to reallocate away from equities in to fixed income.” 
Election years have been treacherous in recent times and we have been tracking the eighth year of the president’s term closely. The February-April rally had pushed the market back into the bullish, incumbent party win pattern, but trading since mid-April has the market on the ropes again. Here are a few different looks at how 2016 is stacking up against history. 
[DJIA 1-year seasonal]
[SP500 1-year seasonal]
[NASDAQ 1-year seasonal]
The above chart of DJIA’s 1 year pattern, illustrates several different historical election-year patterns that cover all the potential scenarios for 2016, at least from this 4-Year Cycle perspective. The graph charts all election years since 1901 against eighth years of terms, years when no sitting president was running, incumbent party wins and incumbent party losses and 2016.
Earlier this year we were tracking closer to the weaker patterns. For the past couple of months DJIA and S&P 500 have been on the more positive track. NASDAQ has been lagging all year. Since mid-April stocks have failed to gain traction and if they don’t gain some soon it could be a cruel summer for the bulls. 
The market abhors uncertainty. And Trump scares the pants off The Street. He may be a businessman and many things, but one thing’s for certain, we have no idea what he’ll do in office. At least we have an idea of what Clinton will do. Negative ads on Trump have yet to derail him. If Trump continues to prevail, I suspect the market will retreat, increasing his odds of winning and of flat to negative market returns in 2016. On the contrary if Clinton starts to shine the market will likely do better. I don’t expect much upside until after the conventions.
Summer Shorts
With the market in retreat and the campaign rhetoric turning up another notch (if you can believe that), it’s time to prepare for more downside and our NASDAQ Best Eight Months MACD Sell Signal. The Clinton power machine is now taking direct aim at Trump, while he has yet to really begin counter-punching. Yet Clinton does not seem to be gaining much traction with the shots at Trump. This year’s election campaign is about get very interesting.
Meanwhile, the economy is not exuding robust growth. The Fed is on the verge of raising rates again, and it may surprise with a hike in June or July as inflation just up-ticked more than it has in the past year. NASDAQ is underperforming and is down -1.4% since our Best Eight Months MACD Buy Signal on October 5, 2015. This is not a good omen. 
In the chart below NASDAQ is struggling to stay above pivot point support (green dotted line) and the pink line 50-day moving average is nearing the red 200 DMA and the vaunted golden cross, which we have shown to be less significant than believed and often associated with tops and the extended rallies, than the beginning of a new up move.
[NASDAQ Chart]
In preparation for the Worst Four Months July-October, we like to remind you that we have found it imprudent to employ a fully defensive posture, until after our NASDAQ Best Eight Months MACD Sell Signal, which can only occur on or after June 1. We already have assumed a cautious stance and taken several defensive positions. While we remain data dependent, we will likely not add more shorts until early July.