Expecting The 'Sell In May And Go Away' Pattern? Prepare For A Surprise

| About: SPDR S&P (SPY)


It's the same ritual every year - May rolls around and the media is trying to figure out whether to "sell in May and go away."

Seasonality suggests a weak 2014 May, but sentiment allows for a "curve ball."

My forecast calls for an April, May or June correction of more than 10%, but unfortunately, I may have dug my own forecast's grave.

"Sell in May and go away."

Will the most chewed-out adage on Wall Street be a fact or farce in 2014?

Like me, you probably have a vested interest in getting the whole "sell in May" business right (my vested interest is explained below).

The S&P 500 chart below marks every May 1 (or first trading day in May) since 2009.

Historically, "sell in May and go away" is right many more times than it is wrong.

But, I'm a contrarian investor and always suspicious of the "trade most traveled."

The crowded trade generally turns from bliss to blister in a hurry.

Is the "Sell in May" Trade too Crowded Right Now?

On Monday, I saw a prominently featured strategist proclaiming and explaining "why the sell in May adage makes sense this year," and a Barron's article asked: "Sell in May and go away?" (the answer was yes).

It seems like the media is conditioning investors to sell in May. The masses are rarely right, so the market may decide to deliver a curve ball.

This in turn would be unfortunate, because my 2014 forecast (published on January 15, 2014) proposed a larger correction to start in April or May.

Why a larger correction? The stock market is not yet displaying the kind of bearish divergences indicative of a major top. A 10%-plus correction would reset some of the more bullish sentiment readings and introduce the kind of pessimism needed to push us out of the 2014 "chopping range."

Below is an excerpt from my S&P 500 2014 Forecast (see image).

The S&P 500 (NYSEARCA: SPY) has adhered to its historic seasonality pattern fairly closely. As proposed, seasonality limited the February correction to 1,746 - 1,730 and pushed the S&P to new all-time highs in April.

The S&P has tracked the 2014 Forecast beautifully, but the increased coverage of the "sell in May" pattern is turning the 2014 forecast into a crowded trade.

Now I'm Part of the Problem

It gets worse. On Monday, Investor's Business Daily (IBD) asked me for an updated 2014 outlook.

Good news: IBD published my outlook (Excerpt: "The stock market tends to be weak from April to June in midterm election years" - click here for full IBD S&P 500 forecast article).

Bad news: The actual headline of the IBD article: "Why Investors Expect To Sell In May And Go Away."

Am I Digging My Own Outlook's Grave?

After reexamining various indicators, the weight of evidence still suggests an April/May/June correction.

The S&P 500 seasonality chart of mid-term election years emphasizes a deeply bearish bias (click here for the updated S&P 500 seasonality chart: S&P 500 seasonality chart), which by the way started already in April.

However, the market will be trying to trick investors to jump on this probably crowded trade. This could be in the form of a delayed correction, a shallow correction or a fake out rally (bull trap).

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.