Seasonal and Technical Setup for the S&P 500

So much for selling in May! The idea of selling stocks in May and buying back into the market when seasonal strength tends to return in November would be a painful trade thus far. With only two trading days left this month, the S&P 500 is up 4.6% in May, enough to qualify for the sixth-best May since 1950. The rebound back to record highs has also pared April’s 4.2% drop. Perhaps April showers bring May flowers is a better market analogy than “Sell in May and Go Away” — a strategy we contested in our Weekly Market Commentary earlier this month.

Peeking forward to June, seasonal trends are hardly anything to get excited about. Since 1950, the S&P 500 has generated an average and median June price return of 0.1%, with 55% of months posting positive results. However, for the remainder of the year, the S&P 500 has posted respective average and median returns of 4.9% and 6.4% after May. Returns from May through December also improve when May is positive, with respective average and median returns bumping up to 5.4% and 6.8% (73% of occurrences also posted positive results).

S&P 500 Seasonality Setup (1950–YTD)

Source: LPL Research, Bloomberg 05/30/24
Disclosures: Past performance is no guarantee of future results. All indexes are unmanaged and can’t be invested in directly. The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1950 incorporates the performance of the predecessor index, the S&P 90. 

Technical Setup

The S&P 500 rallied above March highs earlier this month and notched its 24th record high of the year. The advance was largely driven by a handful of mega cap stocks that rallied on strong earnings. In fact, chipmaker NVIDIA (NVDA) has contributed to just over one-third of the S&P 500’s gain this month alone.

From a technical perspective, the breakout to new highs this month was a little underwhelming. Participation in the rally was relatively narrow, with fewer constituents making new 52-week highs and trading above their 200-day moving averages (dma) than back in March. Furthermore, the lack of overbought conditions amid the rally created a negative divergence between momentum and price action. For example, the S&P 500’s Relative Strength Index (RSI) — a momentum oscillator used to measure the velocity of price action to determine trend strength — failed to reach overbought territory or levels commensurate with prior highs registered earlier this year.

Important to note, narrow participation in breakouts above key resistance has been characteristic of this bull market (generals lead, soldiers follow). For example, the breakout to new highs in January saw fewer stocks trading above their 200-dma or making new highs than in December, while the RSI had also formed a divergence from price action during this period. Rotational forces outside the mega cap space kept the rally going.

S&P 500 Pulls Back From Record Highs

Source: LPL Research, Bloomberg 05/30/24
Disclosures: Past performance is no guarantee of future results. All indexes are unmanaged and can’t be invested in directly. 

Summary

Despite a bit of a slowdown into month end, May has been an unseasonably strong month for stocks. The rally has been relatively narrow, with mega cap stocks doing most of the heavy lifting. Limited participation at key breakouts has typically been followed by rotational buying into other cyclical sectors during this bull market, putting added pressure on stocks to broaden out for this rally to continue. Seasonal trends point to June potentially being the start of the summer doldrums, but returns skew positive between June and year-end, especially for years that include a positive May.