May Outlook: Repositioning Neutral for Debt Ceiling Showdown & Range Bound Worst Six Months
By: Jeffrey A. Hirsch & Christopher Mistal
April 27, 2023
We are thrilled to report to you this month once again from the Annual CMT Association Symposium being held in Midtown Manhattan this year. Last year we were honored to present to this august body of the finest market technicians in the land. This year it is our pleasure just to be among these giants of technical analysis to exchange ideas, hear what our peers think about current market conditions and as always learn a thing or two.
To kick off the event, Tyler Wood, CMT, Managing Director of the CMT Association, took a straw poll of where the S&P 500 would finish 2023. A. Below 3600 – 15%. B. Stuck between 3750 and 4250 – 58%. C. Above 4500 – 21%. D. At all-time highs – 6%. Interestingly, the bulk of this highly informed crowd is leaning toward our base case scenario of 10-15% gains. For what it’s worth, last April this group was rather bearish – and rightly so.
In case you missed it, we issued our Best Six Months MACD Seasonal Sell Signal for the DJIA and S&P 500 two days ago on Tuesday, April 25. We have not issued our Best 8 Months Sell Signal for NASDAQ, which lasts until June. In Tuesday’s Sell Signal issue, we presented several Almanac Investor Tactical Seasonal Switching ETF Portfolio Trades:
SELL SPDR DJIA (DIA) and SPDR S&P 500 (SPY) positions. Continue to HOLD Invesco QQQ (QQQ) and iShares Russell 2000 (IWM). Tech stock and market strength after the Sell Signal looks to be fortuitous for us as NASDAQ has rallied strongest over the past two days on better-than-expected earnings and guidance from big tech – notably MSFT and META. 
We also offered several low-fee bond ETF options: iShares Short Treasury Bond (SHV), iShares 0-3 Month Treasury Bond (SGOV), Vanguard Total Bond Market (BND), iShares Core US Aggregate Bond (AGG), and iShares 20+ Year Treasury Bond (TLT). Please review the issue and the portfolios for our current advice and suggested buy limits. We SOLD iShares DJ Transports (IYT), SPDR Industrials (XLI), and SPDR Materials (XLB) as correlating seasonalities end in May. All remaining Sector ETF holdings remain on HOLD. Please check Tuesday’s issue and the Portfolios for updated advice and stop losses.
While we retain our overall bullish outlook for the full year of 2023 for 10-15% gains by yearend, with all the headwinds and obstacles the market is currently facing now is the time to begin transitioning to a more neutral stance for the trepidatious Worst Six Months period from May-October. We do not simply Sell in May and go away. 
This time between our Best Six and Best 8 Month sell signals is when we will be making tactical adjustments, holding positions in sectors that have historically done well in the “Worst Months,” trimming losers and weak positions, limiting new buying and tightening up stops. We will also be considering new positions in historically top-performing Worst Six Months sectors as well as a new basket of defensive stocks.
Range Bound Worst Six Months
The fundamental picture is not so bad. On balance Q1 earnings and guidance have come in better than expected. It’s not fantastic, but not the worst case many feared. The labor market is still robust. Q1 GDP came in at 1.1%, lower than expected. But the folks at the Atlanta Fed’s GDPNow suggest that it may mean Friday’s PCE Index reading will show that inflation is decelerating further. And that may be the data point that moves the needle for the Fed to pause after a likely additional ¼ point hike at the May meaning as well as the end of the quantitative tightening (QT) that has not really gained much traction anyway.
The technical picture from our vantage point at the CMT is clearly range bound with S&P 500 looking like it will remain trapped in the 3800-4200 area, until we likely break out higher in the latter part of Q3 or Q4 at the outset of the next Best Six Months. If you remember, pre-election year highs have frequently occurred in December – and quite often on the last trading day of the year – as noted on page 30 of the 2023 Stock Trader’s Almanac.
The Sweet Spot of the 4-Year Cycle from Q4 midterm year to Q2 pre-election appears to have hit a sour patch. This brings into play the typical Worst Six Months sideways action highlighted in the updated Pre-Election Year and Aggregate Cycle chart below. Look back at the table in the April 13 issue which shows historically meager returns during the Worst Six Months of pre-election years.
[Pre-Election Year Seasonal Chart]
Federal Debt Ceiling Showdown – 2011 Redux?
Last month at this time we brought this looming debt ceiling crisis to your attention. Now it’s the big story. 2023 is the same political set up as pre-election year 2011: Democratic President with a split Congress composed of a Democratic Senate majority and a Republican House majority.  
Speaker McCarthy’s speech to Wall Street last week and the House’s passage of the debt ceiling bill are reminiscent of the first shots across the bow fired by Speaker Boehner and the Republican House in 2011. The 2023 standoff between the White House and House Republicans is developing much like what we witnessed in 2011. 
Markets topped out on the last trading day of April 2011 and entered a mini-bear phase with S&P down 19.4% on a closing basis before bottoming on October 3. 2011’s Worst Six Months were negative with the Dow down 6.7% and S&P down 8.1%. NASDAQ’s Worst 4 Months July-October were down 3.2%. S&P finished the year essentially flat at -0.003%, Dow was up 5.5%, NASDAQ was off 1.8% on the year. As this whole showdown is more telegraphed this time around and we have the experience of the 2011 battle, we suspect the impact to be lesser in 2023.
[Debt Ceiling Chart]
One of our astute subscribers, Alex Fodor at Sonica Capital in NYC, brought this instructive chart of the 5-Year Credit Default Swaps on U.S. Debt to our attention. This chart shows the price of insurance on U.S. debt is rising and is quickly approaching levels last seen in July 2011 just before market really rolled over into the August-September abyss. It indicates there are others besides us concerned about the debt ceiling.
[5-Year CDS Chart]
May and June are the time for Almanac Investors and Traders to make tactical changes, and move toward a neutral approach. The Worst Months are here, and risk is elevated. The market has run into some rather formidable technical resistance around 4200 S&P – although support has proven stout at 3800 so far. 
The economy is finally slowing down as GDP fell to 1.1% in Q1, yet earnings are better than expected and labor remains robust. Inflation is still trending lower, and we expect that to continue, and while this means the Fed is nearing an end to rate hikes and their own neutral stance, it will likely take several months for the economy and the market to digest all that has transpired. Sentiment as measured by Investors Intelligence % Advisors Bullish and Bearish had reached complacent levels associated with short term tops and is now retreating. 
The geopolitical landscape has not improved much if at all and the debt ceiling showdown is just heating up. All this is a recipe for a sideways and volatile Worst Six Months, reinforcing our analysis that now is the time to begin repositioning our portfolio to a Worst Six Months more neutral, defensive posture. We expect a choppy market over the next several months with pullbacks and minor corrections, but for the lows to hold.
Pulse of the Market
Early in April DJIA did bullishly reclaim its 50-day moving average (1), but that positive momentum faded quickly as the first reports of earnings season failed to inspire. On Tuesday, April 25, we issued our Seasonal Sell signal for DJIA and S&P 500 when MACD Sell indicators turned negative (2). As pointed out previously, numerous headwinds are weighing on markets and DJIA has not made a new recovery high since last year. DJIA is likely to remain rangebound until there is further clarity from the Fed and the debt ceiling is raised.
Dow Jones Industrials & MACD Chart
After recording four straight weekly gains, DJIA stumbled last week (3) and ended the streak. As of mid-afternoon today, DJIA is on track to record a modest weekly gain, but even with the gain has essentially gone nowhere since mid-April. S&P 500 (4) and NASDAQ (5) have also been flat over the last half month.
Weekly Advancers and Decliners (6) confirm the recent sideways and choppy trading. In weeks where the indexes advanced Weekly Advancers held a modest majority while in down weeks Weekly Decliners rose. Without broader participation, in one direction or the other, DJIA, S&P 500 and NASDAQ are likely to remain range bound. 
Weekly New Highs (7) have been slowly expanding since their mid-March low of 62 but are still less than half of their peak reached in early February. Similarly, New Weekly Lows have retreated yet remain stubbornly above their low count from early February. This would suggest a lack of conviction in either direction, higher or lower. Ideally New Weekly Highs would increase as the market climbs higher. Should New Weekly Lows begin increasing, that would likely foreshadow weakness.
After a brief pause caused by some bank woes, the 90-day Treasury yield has climbed above 5% (8). The last time it was above this level was in January and February 2007. It has been over 16 years since short-term rates were this attractive. Considering the historically tepid track record of the Worst Months, even in pre-election years, this yield could easily be a catalyst for additional “Sell in May” selling pressure this year.
Pulse of the Market Table