The Rationale Behind "Sell in May and Go Away"

The seasonal 6-month period from November-April has gained +520.9% for the S&P 500 since 1990, 8 times the +65.1% return achieved during the 6 months from May-October.

Both numbers are aggregate total return performance results calculated for their respective 6-month periods beginning on 5/01/90 and continuing through 10/31/14. 

source: BTN Research

Current Bull Market Exceeds the Average Duration...

The bull market for the S&P 500 is in its 66th month.

Since bottoming on 03/09/09 (i.e., 65 months ago), the S&P 500 has gained +220% (total return) through the close of trading last Friday, 08/08/14.

The average bull market for the S&P 500 since 1950 has lasted 58 months.

The Average NASDAQ and Russell 2000 Stock is Already In A Bear Market

There are no perfect stock market indexes that'll give you a complete picture of the state of the market.

Most market-watchers prefer the S&P 500 over the Dow Jones Industrial Average. But the fact that the S&P 500 is with striking distance of its all-time high of 1,897 belies the fact that many stocks in the index and in the market as a whole are way down.

"When we examine breadth in terms of new highs, more specifically stocks that are in ‘striking distance’ to a new high, we see a completely different picture," writes J.C. O'Hara, of FBN Securities. "Often at the end of bull markets, large cap stocks continue to rise and the smaller stocks begin to flatter."

The S&P 500 is cap-weighted, which means larger companies like Apple and ExxonMobil have a much larger impact on how the index moves.

"High cap stocks influence the averages more thus can mask internal weakness," continued O'Hara.

O'Hara's research found that the average S&P 1500 stock is down by more than -12% from their recent 52-week highs. The average stocks in the Russell 2000 and Nasdaq Composite are down by more than -20%, which means you can say they are in bear markets.

"Historically, this sort of divergence does not bode well for the longevity of a market’s upward inertia," said O'Hara. "We went back and examined instances where the market made a new high and looked at where the median stock sat compare to its high. Our data suggests that the current breadth reading is very unhealthy. Not only are new highs diminishing but we are seeing many stocks making new lows. This breadth divergence is a major concern."

O'Hara says this isn't necessarily a screaming sell signal.

"However the powerful message of “there is something wrong” should not go unnoticed," he cautions.


Read more: The Average NASDAQ and Russell 2000 Stock is Already In A Bear Market

The S&P 500: Bull Market Duration Perspectives...

7 of the last 10 bull markets for the S&P 500 stock index have reached at least 3-years in length and 5 of the 10 lasted at least 5 years.
 
The current bull market is the 11th bull for the S&P 500 since 1949 and it will mark 2-years in length on March 9, 2011.

Source: BTN Research

4th Quarter Corporate Earnings: Strong Results...

The health of corporate earnings has more to do with the movement of stock prices than any other measure.

And we just came through another strong earnings season for the S&P 500 as evidenced by the following...

3.42 stocks had a positive surprise for every 1 that was negative.  

1.88 positive estimate revisions ratio. Means that earnings estimates are moving up for the future.

Year over year growth of +43.7%.

Strong earnings that beat expectations and were revised upward are the major reasons why stock have performed so well in the past 3 months.