Investors should drop 'sell in May' strategy as summer stock-market rally could be in the cards, Bank of America says
- Investors should abandon the often-said "sell in May and go away" market axiom, as a summer market rally happens more often than not, Bank of America said in a note published on Monday.
- Instead, investors should sell in July/August instead of May to avoid missing a strong summer market rally.
- The bank thinks summer seasonality data and contrarian bullish sentiment indicators suggest a summer rally or catch-up trade is in the cards for the stock market.
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Despite the S&P 500 recently stalling at the resistance level of 3,233, there is still potential for a summer rally, according to a note Bank of America published on Monday.
The bank said it's a mixed bag for the stock market right now. While it held big support at the 2,930 to 3,000 level last week, it also stalled out a number of resistance levels and is now range-bound.
Still, "seasonality favors a summer rally as contrarian bullish Farrell Sentiment and futures positioning across large speculators, leveraged funds and asset managers suggest that the pain trade remains higher and equities continue to climb a perpetual wall of worry," BofA said.
Resistance levels that the S&P 500 needs to reclaim include its recent high of 3,233, the late-February downside price gap of 3,260 to 3,328, and the mid-February peak at 3,394. On the flip side, if key support at 2,930 to 3,000 decisively breaks, support levels to watch include the 38.2% Fibonacci level of 2,835, the May lows of 2,766 to 2,797, and the 61.8% Fibonacci retracement level of 2,589 to 2,640.
The bank continued that investors should abandon the "sell in May" thinking due to seasonality data that suggests a summer rally is possible:
"The second best 3-month period of the year for the S&P 500 going back to 1928 is June - August, which has been up 64% of the time with an average return of 3.1%. Within this bullish three month period, most of the fireworks occur in July, which has been up 59% of the time with an average return of 1.5%."
The bank added, "so 'sell in May' should be 'sell in July/August.'"
Besides the strong seasonality data arguing in favor of stocks for June to August, BofA noted that positioning data suggests more upside for the stock market. Large speculators in the market have the "most aggressive net short since February 2016," according to BofA.
The bank said that large market participants "have not had an aggressive net long position as a percentage of total open interest since October 2018," suggesting that most investors don't believe in the recent 40% and higher rally in stocks.