The old stock market rule “sell in May and go away” is on everyone’s minds once again.
For some reason, this strategy has a long and successful track record.
Furthermore, it would’ve worked brilliantly in the last three years.
JP Morgan’s Tom Lee discusses the current sentiment in his new note to clients:
“The consensus of “sell in May” is built on multiple arguments but the most prominent seem to be: (i) treasury yields and commodities have plunged; (ii) downside reads in economic data; and (iii) this has held up in 2010, 2011 and 2012, so why should 2013 be any different.”
However, Lee’s not convinced this will hold up this time around for three reasons. He singles out hedge fund positioning as being the “most notable.” JP Morgan’s hedge fund indicator is a contrarian indicator. In other words, when hedge funds are bearish, you should be bullish.
From his note:
We want to take the other side of this trade for multiple reasons, but the three most notable: (i) client positioning is diametrically opposite of that in the last 3 years—HF beta, for instance, rather than registering the highs of the year in April (as was the case in 2010, 2011 and 2012) is at the lowest levels since 8/12 (see Figure 6); (ii) we believe the early downturn in gasoline (and other commodities) will act as stimulus in coming weeks by as much as 50bp lift to GDP (q/q)—in past 3 years, gasoline surged in 2Q and thus was a headwind; (iii) the message from continued improvement in jobless claims (new cycle lows this week at 324k) and the rally in HY market in the face of mixed economic data argues the seasonal weakness in the economy is not likely to play out in 2Q as in past years.
Check out this chart from Lee’s note:
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