Talking 'Sell in May' with Jeff Hirsch (FvF Ep. 186)

I am the editor-in-chief of the Stock Trader's Almanac, and I refer to myself as son of legend since my father, who started this thing 60 years ago, is the real legend.

No, I'm saying if selling in May hasn't worked, right? Like, it's, you know, the markets rallied last couple of years, May through, you know, September, right?

That's because people's perception of it is wrong.

You don't throw it out. You look at the longer history. We compare things over different time frames. 10 years is starting to get into the realm of statistically significant, especially in the work that we do. But we look back to 1950, 1949, the post-World War II era. We look to '71 when NASDAQ started. We like 21 years because it's a couple of cycles. It's an odd number. You don't get any 50%, you know, up 10, down 10, you know. That's a prime frame we use a lot.

But you also have to take the framework that it's not sell in May and go away. It's reposition in May and realize that May through October are the worst six months of the year and not necessarily this down period where the market's going to go down. And nobody ever said May 1st.

And you see the sideways pattern which shows up strong on the midterm year charts that we're all looking at. We can look at a couple of charts if you want to throw something up there. But the other thing is people forget you got to buy in October and get your portfolio sober before you sell in May and go away. And we use MACD, a technical indicator, overlaid with the seasonal pattern to improve the gains. And you know, I sent you guys a couple of charts.

What's MACD? MACD is a technical indicator invented by the late great Gerald Appel. It stands for moving average convergence divergence, which is a combination of a few different exponential moving averages, not a simple moving average. An exponential moving average puts more weight on the most recent data point. So you take the standard one that all the technicians use is 12-26-9, say the difference between a 12-day exponential moving average and a 26-day — excuse me, it can be any period, we use the daily close — the difference between the 12 and 26-day exponential moving average, and then you plot the 9-day exponential moving average of the difference, and you get this crossover. It shows up on a lot of charts.

We use the original research from Gerald Appel with the 8-17-9 on the buy side in the October period when we're looking to get in. We start looking for a crossover around October 1st, on or after October 1st, versus a sell on or after April 2nd — excuse me, April 1st, the first trading day. I'm not sure why I said second there. And NASDAQ goes for eight months into June. So we've seen a lot of these recent sell — you know, you talk about selling may not work in the last 10 years. We got some great sell signals, you know, MACD's in like mid-July when you see that midsummer peak. So things shift.

Last year as well, we got a little — you know, we had that late, like one-day correction that was like last day of July, first day of August. But you can see the impact of what, you know, you're queuing on there with sell not being as pronounced as it used to be, with the impact of the NASDAQ dragging that seasonality out a little bit further into June. There's a lot of that tech weight in the S&P.

So we like to reposition in May or begin to. So between our Dow and S&P sell signal on or after April 1st and the NASDAQ one whenever it comes after June 1st, we start to reposition. We, you know, kind of limit new longs, tighten up stocks, get rid of losers, and, you know, sort of do some spring cleaning in the portfolio as opposed to going away. Everyone likes a headline, right? So basically it's saying reposition in May, assuming you've gone sober in October.

There's also sector seasonality, you know, and we put out a recent chart on which I sent you on worst six-month sectors. One of the ones we like here is utilities, you know, the XLU. We also put out a basket of stocks, some of the bigger ones a little bit focused on nuclear and dividends and, you know, cleaner energy like, you know, some of the big utility stocks because utilities have done very well during the weak months. They benefit from, you know, the weak months for equities. They benefit from the air conditioning season. I mean, I know everyone talks about heating for energy prices going up, but I don't know, last I checked, a lot of my electric bill was a lot higher in July here in — it just keeps going up for all of us.

And then you get the benefit of the macro trend with the data center electric needs for the world these days, and there's a dividend there. So, you know, that's sort of the story there with some — there's other sectors that we like to —

Staples are in there. Another solid sector in the worst months.

How do I square it? I mean, I also sent you the chart where I lay it, you know, right across the midterm year pattern, the pattern, so you can see.

That's where the rubber meets the road. That's a $64,000 question here. I put a lot of weight on it right now because of what's going on. But I also, you know, throw at you the post — the before-and-after crisis chart where we see this initial bounce off of the crisis low, which we had, and then there's this sort of sideways thing. And now you can track the news flow yourself. And we've heard it even the past — you know, the past two days are a perfect example with, you know, you get shots fired and then boats being escorted out. And, you know, I'm of the belief that, you know, it's going to take some time for there to be some resolution there. And I think that along with the midterms, you know, the politicking heating up is going to keep a little bit of a lid on it. I don't suspect we'll get anything, you know, further downside, new lows, but I think it's going to keep us bouncing along choppy sideways through, you know, the weak summer months towards the midterms, unless of course, you know, things get resolved with Iran and the Strait of Hormuz. Then we're off to the races.

So I square it with, you know, the fact that there's a lot of headline risk out there. And we've got the earnings strength, we've got the technical strength. You know, the Fed's probably not doing anything. We've seen, you know, long rates hit highs recently. So to me, that just, you know, gets us going sideways. I still have a bullish forecast for the year. We put out in December for 8 to 12% year-over-year on average.

I'm like, wait a second. This guy, he keeps shaking stuff up in Q1 and then letting it ride and working the deal, you know, through Q2, Q3. So I went in there and I just dropped the five years, you know, the first term in '25 into our software. And there's the chart that you see, and it's uncanny, you know. And Ryan, you know, we've talked about it over the years, you know, like the reason these patterns exist is one of the roots of behavioral finance. It's human beings are creatures of habit. I mean, you guys record this show the same time, you know, every day, every week. We pay our bills the same time every month. We get up and go to work the same times. You know, you got that 2:30 in the afternoon sort of a dip in the market when everyone goes and gets a coffee. You got institutions driving the seasonal behavior with the quarterly system. And the reason selling in May and October phobia and, you know, buying in October work is the mutual fund deadline October 31st. That's what really drives it. You know, there's a psychological bullishness that comes in at the end of the year where people are getting a lot of money and bonuses. But, you know, and I discussed this with Steve Eisman on his show, and he jumped in and kind of proved the point for me that, you know, there's this window dressing that happens. You know, October 31st, the funds — you know, with the Investment Act, the 40 Act, they have to reconcile their accounting and make transactions for year-end distributions, the 10 months ending October 31st, the previous year's 10 months, and then the calendar year, and it creates this churn. There's also the window dressing where they get rid of their losers even though they should probably be buying them then, so they pump up their portfolio, and this creates that October phobia, that churn that we see with September being the worst month of the year and October being the bargain month, the bear killer, which is what wrote about in '69.

And, you know, back to the Trump cycle, that's just his personality, his habit is to take care of the dirty work early in the year.

Yeah, because that was one thing I've said. We actually, by the way, we have a 12 to 15% target. We've had that all year. Better than average because the macro stuff we look at, we think it's a little bit better and people give it credit, look at earnings, and we think we're very comfortable with that. 12 to 15. I know your 12 is your low end or your high end — 12 are high. So we'll see. Maybe we can hit something around there.

That was really, you know, one of the things that we were looking at. I mean, the chart that you put up there before with the Trump's, you know, taco trade cycle on there with the midterm year, the sixth year of the presidency's on that, and then you, you know, you wisely mentioned the sixth year of the decade, which has some — we don't put as much weight on the decennial cycle, but there's a few years that do. So we have an aggregate cycle, people do composites. This is all years since '49, the sixth year of the decade, and the midterm year, and the sixth year of the presidency is in there. So the aggregate cycles, all midterm years, which is like the 8% in there with all years and the sixth year, and then the sixth year of the presidency up there's your 15% right there on my chart. Then I mean, so that's our upper end. We give a little bit less probability to, but, you know, we could do 15 to 20 if this war gets, you know, resolved and the earnings continue to come in. And, you know, I mean, it's all part of that super boom forecast outlook I put out there a bunch of years ago, which you remember, this AI —

That first came out in May of 2010 when the —

No, that's all right. And again, in October 2011, I remember sitting in a Ritholtz conference back then, and I think it was Aaron Task, right? He was hosting a panel, moderating a panel. Good guy. And he said, 'A show of hands.' And it was some room in the city where everyone's at, you know, the tables with waters and stuff on there. The show of hands: any bulls in the audience? My hand goes up. I'm like the only one. I think there was two other ones maybe.

But you know, yeah, we got some hate. Our buddy Barry Ritholtz, his headline was 'WTF' with my — and then he did the math and he realized that, you know, the projection was basically a 4.9% compounded annual growth rate from the close of '99 to the close of '25. And it went ahead and the number I put on there was a six-fold move, a 500% move. So it was Dow 38,820 by 2025. We beat that. We're there.

Then we've recalibrated it to that October 2011 low, which is probably kind of like the 1980-August '82, you know, equal sort of end of secular bear, not the ultimate low, where from there we'll probably get us up to 62,430 is our new target for the boom.

Right. Oh, it could be, sure. You know, I mean, you can pull a little Warren Buffett. I mean, cash gives you time to think, and, you know, cash as a position. We do hold on to some. We put it into some of the shorter-term bonds, just, you know, the bond ETFs. But, you know, in all honesty, the US equity market — I mean, there are some different seasonal patterns. Like, you know, in the Far East, there's a Chinese New Year impact there. But a lot of the equities, international equities, do track some of the seasonal behavior from the US markets. However, you know, there's been a pull away from, you know, US being the only place to be. Last year, we noticed that and we got into some of the bigger European stock funds, the IDV, EFV, some of those, you know, the ones that got like the Siemens and the big European conglomerates. You know, just the more stodgy, solid, like you were saying, dividend payers. So those positions have done well for us. But on the seasonal trade, you know, the US is still kind of driving the big pattern, except for, you know, some of the more cultural impacts in different parts of the world, especially, you know, Chinese New Year's I mentioned and Hong Kong and —

I'm as old as the Almanac crow. I'm going to be 60 in 21 days.

I think October 23rd was my father's birthday. It's another good though.

Okay. Okay. I have nine-year-old twins, and so one is sick, the other wishes probably they were sick so they could stay at home too. No, I had chocolate cake on my birthday. I mean, that's what we —

Well, you know what? Interesting. He went out on his own and incorporated the company while my mother was pregnant with me. Incorporated in February and I was born in May. And, you know, it was a gutsy move. But there were a lot of reasons. It seemed to have worked out in the long run. You know, God bless my mom. She was a saint.

I do. They're a little older. My mother was married before, her first husband passed away years ago. And my father adopted my brother and sister when they got married in '63 before I was born.

My brother chimes in and roots for me. He has a few comments on LinkedIn there. My sister always likes everything too. But yeah, they're really old. They're good though. They helped raise me.

Well, I mean, he was not the athletic guy, even though he was a big guy. He used to wince when he came to my games and I would, you know, crush people in lacrosse or football. So I didn't get that from him, but he was a composer. He was a musician. He wrote a musical, tried to produce. Actually, during Gulf War I, you know, when we're watching all those, you know, Schwarzkopf and those guys do CNN and — oh yeah — he was writing this musical about the Elephant Man. And, you know, I just started back with the — you know, moved in with the family. I was living back in the house underneath his piano listening to him compose this. So it was called American Melissa, sort of a Phantom of the Opera love story. But, you know, he liked the joke, man. He used to play pranks on me all the time. Just to see the look in my face just cracked him up. So he, you know, he was a smart man.

'21. Just after his 98th birthday, we all celebrated 98.

Yes. My father called that the indicator graveyard. Things get relegated to the indicator graveyard. The old one, I don't know if you remember this one, Ryan, but it used to be the September reverse barometer. That died a long time ago. That was one of the ones initially.

And the other thing that we've seen is, you know, the monthly cash flows, the used to be the monthly five-day bulge, and we've seen that shift. So back in the '90s, I was working on the book. I was working for my father full-time. We were working on the next edition of the Almanac, and we were looking at the cash flows. It's on page like 140.

You can see the change in the pattern there. And so what happened was we're sitting there looking, and this was one of the cycles I used to work on when I was a kid with this little red ruler that I — this little tiny ruler that I keep at my desk, is to go down the Barron's pages with a red pen and update the underline upticks and then run the numbers using an adding machine and graph paper. So what we saw was all of a sudden instead of it being the last day of the month, the first four days of the month being the monthly five-day bulge, we saw this mid-month spike coming in and the 11th and 12th — 10th, 11th and 12th trading days. And we had this realization that it was payroll deductions going into 401ks, the bimonthly or every two weeks deductions. And then —

So around the 15th, 16th, 17th, around that time there. And then, you know, when mutual fund managers get money, they have to by law put it into the stock market. They can only have a certain amount of cash, like 5%. So that's one of the ones that shifted. That was a big shift. But every month has its own personality with, you know, what days are stronger, like beginning of August is really weak, and that by Ryan's birthday, that turn of the month there from October to November, the strongest turn of the month trade.

Because of the mutual fund — the retirement accounts, all the money going in, the big move to 401ks and IRAs.

Yeah. Institutional movement of money.

It's like one and a half million and counting.

We had some big years. I mean, we do 30 —

40,000 a year, and then just before the top in 2000, we sold like 77,000 in one year.

I'm a little dubious of AI to find the patterns. I do use it to look up some research and just get some — instead of what I would Google search or go through a book and read, I'll look for what happened when, and this, and I'll use it for some editing and proofing and, you know, just freshening things up a little bit. But we haven't — I mean, we have a little bit of our own AI built into our own software where we query it for patterns. I mean, that's what I mean — the Trump pattern, this the taco trade, that was, you know, that wasn't AI, that was real intelligence. I was like, wait a second. But we use the software to look for things and they're kind of our own little language model there.

From my old philosophy days, there is no objective reality.