Chart: The S&P And 'Sell In May' In An Election Year

 |  Includes: SPY
by: Kevin Wilbur

Provided below is a graphical display of the professionally favored and broadly watched large cap stock market index, the S&P 500 (index SPX, ETF SPY).

The SPX is the favored index used by professional analyst and investment managers domestically and globally. It is the predominate and most representative measure of the US Large Cap Securities Market.

Presented below is a chart which helps to illustrate the effects on the price level of the SPX by

  1. the Presidential Election Cycle, and
  2. the Congressional Election Cycle.

In this illustration I am focusing on a graphical presentation of the old Wall Street adage "Sell in May and Go Away."

In my research, I have found that this adage is particularly pronounced in presidential and congressional election years, and can start the beginning of a major stock market selloffs.

It can also occur in regime change election years as well (which usually occur every eight years, but can occur in four years too).

Interestingly, both of the last two years may also foreshadow a May selloff this year, and is also shown on the chart (see the May 2011 and May 2010 echovectors highlighted in beige).

A list of guide lines to help you use and interpret the chart follows:

  • Click on the chart to both enlarge and zoom. Use your optimum display settings.
  • The SPX chart is a 10-Year Weekly OHLC (Open/High/Low/Close) chart.
  • The Congressional Election Cycle is displayed in alternate yellow and aguablue vectors. These alternating color vectors will help discern every two years along the chart from the first trading week of May more clearly.
  • The selloff from the first week of May traditionally to the second or third week of August is displayed with a red vector. The white bars located under "Congressional Cycle" or located on the weekly price line also display these annual selloff lengths and sums.
  • In solid green are correlate dates of the weekly price bars indicating the beginning of the selloff on the first trading week in May for the referenced cycle years.
  • In solid red are the correlate dates of the weekly bars completing the selloff sum at that time. Notice in many cycle years that lower lows are achieved before this date.
  • The horizontal solid pink line illustrates how the SPX achieved nearly perfect correlate price level in May four years earlier on a weekly closing price basis. This is often referred to as a resistance price level vector.
  • The dotted-green lines represent some key eight-year (the usual duration of a Presidential Regime) price vectors and ascending price channels that have been identified.
  • Take note of the magnitude of the selloffs from:
  1. the first week in May of Regime Change Cycle Election years, and
  2. as measured from its preceding year's price level high in the summer.

A good interpretation of this chart would include its clear implication to "Sell in May and Go Away" during a federal election year. This would apply all to congressional election years, and especially to ones that include presidential elections with potential regime change possibilities. It is clear that May through mid-August is particularly vulnerable to price level falls during such years. And in years with potential regime change possibilities, the fall may prove to be particularly serious and extend in time and magnitude before the full price level correction is completed.

We hope this presentation helps to support the case for considering the application of portfolio value level insurance with regard to major stock market composite index based funds and ETFS during this time of year, and particularly during federal election years like the present one.

Major stock market index funds and ETFs typically comprise a significant portion of many portfolios in passive professional management guidance and care. In the present era of active and advance financial management and value optimization techniques and services, better and perhaps more prudent price protection strategies and portfolio management are available especially for times like now.

SPX 10-Year Weekly OHLC Chart

Click to enlarge.

Click to enlarge

Disclosure: I am short USO.