2013's Bullish Kickoff Could Scuttle 'Sell in May' Playbook

A quick look back at history shows that May is typically a subpar month on Wall Street, with equities often stuck in pre-summer doldrums and some investors embracing the “Sell in May and go away” adage.

But as market participants prepare to flip the calendar to May and begin dreaming of their vacation plans, those historical trends may be muted this time around by 2013’s bullish start and Ben Bernanke’s addicting easy-money policies.

According to S&P Capital IQ, the S&P 500’s average May return is three times stronger when the index generates a positive January and February, as it did this year, and its frequency of advance jumps to 65%.

“History says, but does not guarantee, that this May could fare better than most,” Sam Stovall, chief investment strategist at Capital IQ, wrote in a note to clients on Monday. “Catalysts remain central bank liquidity and the lack of alternatives in a period of rising concern over global economic growth.”

After feigning a more bearish trend earlier in April, U.S. stocks have resumed their bullish stance in the face of disappointing economic headlines, leaving the S&P 500 flirting with another all-time record high on Monday.

In fact, the S&P 500 has already rallied almost 12% this year, nearly besting 2012’s very healthy rally of 13.4%.

“I don’t think the market is at a huge risk for a major correction, but I also don’t think you can look to the future beyond May to ratchet this puppy up beyond another 5%,” said Marc Pado, U.S. market strategist at investment advisory DowBull.

May Pullback Concerns

With that backdrop in mind, investors are now bracing for May, which is historically the fifth worst month for the S&P 500 since 1945.

The broad index has inched up an average of just 0.21% in May, compared with an average gain of 0.66% during all months and 1.54% during April, according to Capital IQ.

However, that average May return jumps up to 0.79% during years when the market advances in both January and February, like it did this year.

Likewise, Stovall said the frequency of advance for the S&P 500 climbs to 65% during those years with a bullish start, compared with 52% in all years.

It makes sense that May tends to be a better month after a positive start to the year because the S&P 500 has never posted a full-year decline following advances in both January and February, surging an average of 24%.

Still, this May includes a number of potential obstacles, including a Federal Reserve policy announcement on Wednesday, the jobs report on Friday, volatile commodity prices and renewed concerns of an economic slowdown. There are also several geopolitical question marks, most recently surrounding rising calls for U.S. intervention in Syria.

Time to Focus on Vacation?

All of these concerns may bolster calls to follow the old market motto that it’s best to “sell in May and go away.”

This saying is grounded in history as the May-to-October period is the worst six-month window for the S&P 500 since 1945, advancing an average of just 1.2% and gaining in value just 63% of the time, Capital IQ said. By comparison, the strongest period, from November to April, sports an average rally of 6.9% and a gain 78% of the time.

This six-month window beginning in May has fared even worse in recent years, highlighted by tumbles of 16%, 19.4% and 9.9% in 2010, 2011 and 2012, respectively.

There are a number of potential explanations for this seasonal slowdown, including window-dressing by portfolio managers, concerns about third-quarter earnings as well as summertime vacations.

“When you get to May, people start looking forward to summer vacations and graduations. It’s a function of our society more than what is driving the market,” said Pado. “Even in good times May ends up being the beginning of some stalling in the market.”

Pado also noted that there is an absence of a major retail holiday like Christmas and Valentine’s Day that can help boost sales for the likes of Macy’s (NYSE:M) and Amazon.com (NASDAQ:AMZN).

Will ’13 Be Different?

Still, the bulls may have some cause to believe 2013 could end the streak of poor May-to-October periods.

Capital IQ said in the 26 times since 1945 that the S&P 500 has finished both January and February up, the May-October performance improves to 3.9% from 1.2% in all years, and its frequency of advance climbs to 77% from 63%.

“Regardless of whether the market started well or poorly, I don’t think it is wise to sell out of stocks altogether,” Stovall said, noting that the 1.2% advance in all years is still a better return than money-market accounts would have offered.

Stovall also said that the S&P 500 enjoyed a 14% or greater May rally during three recent years: 1997, 2003 and 2009.

Instead of retreating from the market completely during these seasonally-tough periods, Capital IQ recommends rotating cash into more defensive sectors.

Capital IQ said that since 1990 the S&P 500 Consumer Staples and health-care groups posted average May-October price gains of 4.6% and 4.44%, respectively, compared with just 1% for the S&P 500.

"Like whitewater rafting, by allowing the market to take you where it wants to go, you can experience both a thrilling and rewarding ride," Stovall said.

Bruce McCain, who helps manage more than $20 billion as chief investment strategist at KeyCorp.’s (NYSE:KEY) Key Private Bank, said he doesn’t usually buy into seasonal statistics.

“I’d be a little distrustful of those statistics. We have so few observations it’s really hard to tease out meaningful effects from simple statistical artifacts,” he said.

McCain said he is reluctant to be bullish due to disappointing economic and earnings fundamentals and the fact that the rally is being driven by defensive stocks.

“It certainly hasn’t paid to be cautious, but with the economic news not all that favorable, there’s still risk as long as the defensive sectors domestically and internationally lead,” he said.