May Outlook: Market Prone to Short-Term Weakness in May
By: Jeffrey A. Hirsch & Christopher Mistal
April 25, 2019
After a rough start to the “Best Six Months” with the market falling precipitously in November-December the recovery rally has put DJIA up 5.6%, S&P 500 up 8.1% and NASDAQ up 11.3% for the Best Six Months November-April from the October 31, 2018 close to the April 24, 2019 close. This is precisely why we hold our Tactical Seasonal Switching Strategy Portfolio positions without stops – so we avoid getting whipsawed. If our overall analysis were to become dire we would act accordingly, but that is highly unlikely. 
We maintained our resolve, recognized the selling had capitulated, did not panic at the December 24 low and road the recovery rally. The history of the Best Six/Worst Six Months is undeniable and it still works, though there have been off periods throughout its history. But now as the Best Six Months comes to a close at the end of April next week and the dreaded “Sell in May and go away” mantra will be chanted on The Street, we are on the cusp of our Best Six Months Seasonal MACD Sell Signal for DJIA and S&P 500 (NASDAQ’s Best 8 Months runs through June).
When we do get our MACD Sell Signal you, our faithful subscribers and lifetime members, will be the first to know. And as you well know we will not recklessly “sell in May and go away.” We will sell our Tactical Seasonal Switching Strategy ETF positions in SDPR DJIA (DIA) and SPDR S&P 500 (SPY) and in turn take positions in bond ETFs. In fact, Vanguard Total Bond Market Index ETF (BND) has already traded below our buy limit on several occasions since we presented it in our Tactical Seasonal Switching Strategy ETF Portfolio. We will tighten stop losses and limit adding new long exposure to positions from sectors that have a demonstrated record of outperforming during the period. We may also take some profits, trim or outright sell underperforming stock and ETF positions. 
Our overall outlook for the year remains bullish as it has been since our Annual Forecast in December that was followed by a bullish January Indicator Trifecta. The historical strength of Pre-Election Years, which has been self-evident thus far this year, is supported by resilient economic and corporate readings, a dovish Fed clearly done with raising interest rates for the time being and a White House that is supportive of Wall Street. But, as you can see in the chart of Pre-Election Year Seasonal Patterns below, the Dow (black dotted line) and S&P (green dotted line) are already quite close to historical average gains for the Pre-Election year and NASDAQ is way ahead of the pace up more than 20% for 2019 to date. 
Ostensibly, the S&P and NASDAQ are on the brink of clearing the last levels of resistance. But the Dow is struggling and Russell 2000 is well off the pace. S&P and NASDAQ made new all-time highs this week but are straining to hold those levels and there is chatter in technical analysis circles about a bearish double top forming on the S&P and NASDAQ. Also evident in the chart here is the weakness often experienced in the latter part of May. So while we remain bullish on the year, we do expect the market to be weaker during the mid-May soft patch and backing and filing during the Worst 4 Months July-October.
[Pre-Election Year Seasonal Patterns CHART]
Pulse of the Market
Following the three-day holiday for Good Friday, Passover and Easter, DJIA came within 172 points of its all-time closing high on Tuesday April 23 (1). S&P 500 and NASDAQ did close at new all-time highs on that date. Based upon the S&P 500, the current bull market is officially in its eleventh year. New all-time highs by DJIA, S&P 500 and NASDAQ would strengthen the bullish argument, but further gains could be limited as the Russell 2000 small-cap index continues to struggle.
DJIA’s recent surge to nearly new highs produced enough momentum to stave off our Seasonal MACD Sell signal for a few more days, but only by the smallest of margins that is barely visible in the chart (2). DJIA’s faster moving MACD indicator was also positive as of the close on April 24, again by only the slimmest of margins.
Dow Jones Industrials & MACD Chart
DJIA (3) and S&P 500 (4) have advanced thirteen times over the past seventeen weeks. NASDAQ (5) has been even stronger, up fifteen of the last seventeen. Except for the last week in March, losses during down weeks have been relatively mild. This would seem to suggest selling interest remains subdued and unable to undo the current trend.
Market breadth measured by NYSE Weekly Advancers and NYSE Weekly Decliners (6) remained in line with the market throughout the first half of April with Advancers outnumbering Decliners in advancing weeks and vice a versa. However, that was not the situation last week as DJIA and NASDAQ climbed higher while S&P 500 slipped modestly lower and Weekly Decliners outnumbered Weekly Advancers. This could be an early sign of trouble somewhere just over the horizon. Generally when participation wanes a market top is possible soon.
Weekly New Highs had been slowly expanding from low double digits back in December to just over 350 in early March, but that trend reversed during the last two weeks (7). This alone would not be so worrisome, but when accompanied by a rising number of new 52-week lows, this would appear to suggest that momentum is possible fading out as fewer and fewer stocks are participating in this rally.
Based upon historical market data interest rates are still low (8). Relatively low rates that are reasonably stable should support markets. Yes, the yield curve is flattish and some inversion is present on the short duration end, but because rates appear to have found some stability banks, small and large, will find a way to keep making money.
Click for larger graphic…
Pulse of the Market Table