May Sell-Off, Earnings Season And Calendar Events: A Quick Note To Reflect

Includes: DIA, QQQ, SPY
by: Jake & Elwood


Sell in May and go away… Probably not this year.

Earnings make prices in the long run.

Fundamentals are long-term dynamics, but the calendar of macro-related events matters.

By Marco Cecconi and Gianluca Bertuzzo


The recent markets' volatility has probably made this year one of the most difficult to be traded by investors. Hedge funds are struggling due to commodities decline and HYs spike, long-term investors are disoriented from secular shifts in macroeconomics factors (Global banking vs. Fintech, Cash vs. ePayments, Industrial vs. Services economy, Fossils vs. Renewables), and occasional investors are left without easy-to-make asset allocation strategies and clear growth path in corporations prices.

In this scenario of uncertainty, few rescue buoys remain to market participants. Thus, the ability to anticipate, forecast and constantly be up-to-date with calendar events will make the difference to draw wise investment decisions.

This article aims to give investors a quick review of the main factors we should consider to face the next trading months. We continue to believe the markets will eventually grow in line with inflation and valuation mistakes and over-reactions will still grant investors with several income-producing opportunities.

Sell in May and go away… probably not this year

Avoiding the typically volatile May-October period has been a milestone for investors so far. The summer vacation and increased investment flows during the winter months are cited as contributory reasons for the discrepancy in performance between different sub-periods of the year ( However, the exact reasons are not determined yet, and the actual results may detach from the historical averages.

According to the Stock Trader's Almanac, since 1950, from May to October, the DJI Average has performed 7.2 percentage points lower than the November-April period (0.3% vs. 7.5%). As we show in the graph below, these results are consistent with the returns registered in the last five years by the S&P 500. We averaged the index and VIX performances splitting the analysis in the two above-mentioned sub-periods. We dealt with two different outcomes: in the first span, the S&P remained substantially unchanged, while in second one, the yield was 10.17%. Since the volatility is usually negatively associated with the market, we think historical figures allow investors to trade this mismatch between the index performances. In May-October period, we noted the VIX has, on average, assumed two different trends. It declines in May until June (c.-4%) and soars at the beginning of the summer until the end of the autumn (c.9%), totally performing a 5% returns. Conversely, in the November-April period, there is a clear growth path (c.5%) as it steadily rises describing an increasing "fear" over a bear market in the end-year asset re-allocation.

S&P 500 vs. VIX sub-period performances

click to enlarge)


Trying to forecast what could happen this year, we should recall the particular situation we are involved in. After five year of unstopped growth, we have been facing a flat market since August of the last year. According to Strategas Research Partners' Jason Trennert the volatility experienced YTD may not signal "the big one" is coming, but it could be, instead, a symptom of normalization in financial markets. The graph below shows us how the VIX has impressively fluctuated during the last 16 months. The steady decline experienced in the first half of 2015 has been brusquely stopped by two acute bearish markets, both due to over-reactions induced by emerging markets' g-rates concerns. We now see that in the last three months, the volatility index is declining again, a signal of a possible unexpected volatility to come. However, as we said, since August 2015, the S&P have already had two severe corrections and commodities are already priced on a recession basis. Those two factors could suggest the market is at the beginning of a binomial tree where the branches (trends), easy to be imagined, could be triggered by two main factors: earnings and macro-related calendar events.

S&P 500 vs. VIX in the last 16 months


Earnings make prices in the long run

Earnings make prices in the long term, and are undoubtedly figures to be critically analyzed to capture and take speculative and fundamental positions. WS forecasts a 7.9 percentage point plunge in Q1 profits, outlining the steepest decline since the Great Recession. The erosion is part of the broader macro scenario in which a severe decline in the oil prices, the currency turmoil, the developed countries' stagnation and the emerging markets' shift towards a service economy are raising several concerns. However, the recent JPM (NYSE:JPM) and Alcoa (NYSE:AA) announcements are good points to deepen the thoughts. They, indeed, reflect a situation in which corporations based on industrial drivers will probably suffer in the months ahead, while services-based revenues will continue to maintain a sustained, but shaky, growth.

Fundamentals are long-term dynamics, but the calendar of macro-related events matters

Between market conventions and a big question mark on the future of which drivers will lead the next months, several events are coming. OPEC, political elections, monetary policies and other several indicators should be incorporated to make bright investment decisions. Firstly, the cartel in June will have to take an important decision over the production level and consequences are expected both in the oil prices and in the industry related CDSs (for more information see "Anticipating the next OPEC meeting"). Secondly, it is a general knowledge that the market is politically partisan. We are not talking about the choice between Trump and Clinton, but about plans and decision power. Big investors will take the election results on the basis of the strategic path each candidate will be able to draw and the power she/he will eventually have in the Congress to dictate the measure proposed. Moreover, we should consider that Central Banks have finished the bullets to tackle a struggling growth. If it is straightforward that interest rates will remain to the ground for a while, it is absolutely not so simple the way Central bankers will pass their policy to the markets. They could cause fear and, without any more power to inject liquidity and the impressive Public Debt-to-GDP ratio all over the world, that fear could potentially result difficult to be controlled. Finally, figures will flow from emerging markets, and they could trigger the same uncertainty we experienced in August and January.


Giuseppe Tommasi in "Il Gattopardo" said: "if we want things to remain unchanged, all must change…"

Looking at the historical performance of the most important world indexes, we could note that since the beginning of the XX century, we grew and created value for long-term investors despite the crisis and the macro-related changes we experienced.

We continue to believe the markets will eventually grow in line with inflation and valuation mistakes and over-reactions will still grant investors with several income-producing opportunities. Furthermore, we strongly believe we are in the 4th industrial revolution with the ongoing Global-Digitalization trend started in the late 90ies. In such dynamic environment, markets will develop in bubbles and will be unpredictable making passive strategies very dangerous since entire industries could vanish in just few months. Thus, we suggest a proactive attitude targeting secular trends and speculation over the events we face on a daily basis. Each investor should understand its risk-return profile and should be quite sure that in the long run, fundamentals will lead the returns; however, they could wait a while before the markets will eventually move in the right direction. For all of dozen investors willing to load some risk in their portfolio, strong financial analysis tools could help them to try to anticipate the corrections the market will prove.

People are moved by information and, in the short term, information could be very contradictory, generating opportunities to profit from induced volatility.

Finally, we should always have in mind that legendary investors (Buffett, Icahn, et al) made their money innovating. Crisis and difficult situations should be taken as the most fertile ground to seed new way to live the financial markets and ceases to rely on the classical tools.

Disclosure: I am/we are long TVIX.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.