E A Death Match Between Bulls & Bears

On Friday the S&P 500 retested the 200-DMA support level for the fourth time. The market bounced back and until we get a confirmed break below support the market uptrend remains intact and is bullish for stocks. An article in Seeking Alpha newsletter suggests the current state of the market as a death match between two camps - the bulls and the bears. Or dip-buyers versus rally-sellers. 

What we have here is a market that is down, but not out. In fact, the odds of this market making a new high before it rolls over for good are 57%. An LPL Financial Research report says the S&P 500 Index has historically been flat to modestly higher in May over the past 20 years; the index has gained 0.1% on average, with stocks moving higher this month 60% of the time for the period reviewed. When May has generated positive returns for the S&P 500, the average magnitude move higher for the month has been 2.3%; and when negative, the average return has been -3.3%. On balance, May can be a hit-or-miss month for equity returns, with a slightly higher track record to the upside.

LPL Financial Research mentions how a variety of sectors have on average tended to exhibit relative strength during May, with the consumer (consumer staples and consumer discretionary) and healthcare consistently outperforming the index (i.e., greater than 55% of the time). However, if you are interested in a more targeted strategy, you may consider industry-level investments like the food & beverage and tobacco groups, which have posted the highest average relative returns, with a greater frequency of outperformance; or the healthcare equipment & services industry, which has significantly outperformed the index in May over the past 20 years.

Our recent comments remain applicable where we advised “…Holding cash is also a viable strategy if you prefer to sit on the sidelines and wait for a longer-term trend to play out…The current environment tends to favor day-trader type strategies because of daily triple-digit price reversals. As mentioned above, May is typically a tricky month to trade profitably. We are currently investing smaller amounts on shorter duration trades with tight stops to manage risk…”

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Moon Kil Woong 1 year ago Contributor's comment

The market is not that up or down for a good reason. Most of the move is not seasonal but rotation. You can see rotation towards commodity cyclicals as well as energy and away from investments that are adversely affected by inflation as well as companies with high debt loads. Interestingly growth stocks are not down and out but registered good results as well.