Buy in May and Stay to Play?

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Alex Harring and Sarah Min of CNBC report Dow closes more than 570 points higher to post best day in 2024, stocks wrap a winning May:

The Dow Jones Industrial Average jumped Friday for its best session of the year, as investors wrapped up a strong month after the Federal Reserve’s preferred inflation measure came in largely around expectations.

The blue-chip Dow climbed 574.84 points, or 1.51%, to 38,686.32, lifted by Salesforce and UnitedHealth’s respective advances of 7.5% and 2.8%. The S&P 500 added 0.80% to 5,277.51. The Nasdaq Composite ticked lower by 0.01% to 16,735.02, as Nvidia and a few other megacap technology stocks took a hit.

The S&P 500 and Nasdaq snapped five-week win streaks with slides of 0.51% and 1.1%, respectively. The blue-chip Dow slipped 0.98%, marking a second straight week of losses.

Despite the tough week, it was a winning May, with each of the major benchmarks registering a sixth positive month in seven. The Dow added 2.3% this month, while the S&P 500 rose 4.8%. The Nasdaq gained 6.88%, notching its best month going back to November.

“The market is going to remain choppy,” said Quincy Krosby, chief global strategist at LPL Financial, citing variables such as the upcoming election, Treasury yields and consumer spending. “There are questions as to: Where are we headed? Where’s the economy headed?”

A chunk of May’s strength can be attributed to a surge in Nvidia, which released blockbuster earnings last week. Though the artificial intelligence darling’s stock fell about 0.8% on Friday, shares ended the month nearly 27% higher. Tesla and Netflix also pulled back on Friday, hurting the tech-heavy Nasdaq in the session.

Closely followed economic data released Friday morning came mostly in line with forecasts. The core personal consumption expenditures price index increased 0.2% in April, the same figure that was anticipated by economists polled by Dow Jones. Core PCE rose 2.8% on an annualized basis, slightly above the 2.7% prediction from economists.

“This week’s most important economic data came and went without deviating much from expectations,” said Chris Zaccarelli, chief investment officer for Independent Advisor Alliance, adding that the market breathed a “sigh of relief” after the report.

Traders also reacted to the latest corporate earnings results. Dell Technologies tumbled more than 17% despite strong earnings after saying its AI server backlog was smaller than anticipated. Cloud security stock Zscaler popped 8.5%, while developer data platform MongoDB plunged almost 24%. Apparel retailer Gap jumped more than 28%.

And Nick Wells of CNBC also reports that companies post all-time record for buybacks in May, data shows:

In May, companies shattered records with a surge in stock buybacks, suggesting strong corporate confidence in future earnings. A total of 154 companies announced $201 billion in planned buybacks, marking an all-time high, according to data from Birinyi Associates.

Apple led the charge, unveiling a $110 billion buyback program, the largest on record. American International Group and Lam Research each announced $10 billion buyback plans.

Backing up these announcements, S&P 500 companies repurchased more than $202 billion in stock during the first quarter, a figure that may increase as more data becomes available. This marks the highest quarterly total since the third quarter of 2022, when companies bought back $207 billion in shares.

Share buybacks helped the S&P 500 gain another 5% in May, Nvidia helped the Nasdaq gain 7% while the Dow's 2.3% monthly gain was more muted but still solid led by financials and healthcare stocks.

Saleforce (CRM) 8% jump today also helped power the Dow up 570 points higher after the stock got dumped hard yesterday, down almost 20%.

For the month, here are the top-performing S&P 500 sectors (source here):


As shown, Information Technology popped 10% led by Nvidia and a few other tech stocks, followed by Utilities (XLU) which popped 8.5%, Communication Services (6.6%) and Real Estate (XLRE), Materials (XME) and Financials (XLF) which were up 5% and 3% respectively.

Energy was the only major sector marginally down in May, losing 1%.

In terms of stocks, here are the top and bottom performing US large cap stocks in May (full list available here):

And here are the small cap winners and losers for the month of May (full list here):

One thing I noticed in May is short sellers gunned for biotech companies with FDA approved drugs that are held by top biotech firms (APLS, BCRX, DAWN, IBRX, IOVA, MDGL, TGTX, VKTX among them).

There are a ton of other interesting biotechs to keep track of like Biohaven (BHVN), Candel Therapeutics (CADL), Sagimet Biosciences (SGMT) and Summit Therapeutics (SMMT) which was down 20% on Friday but up more than 100% this week after its lung cancer therapy Ivonescimab showed improved progression-free survival versus Merck's multi-billion Keytruda in a study in China.

The biotech space is full of some of the most innovative companies on the planet but it's also heavily manipulated which is why you'll often see short sellers attack companies after FDA approval.

Great space to trade, not particularly great to buy and hold as volatility is insane.

You really need to know when to buy the dips, which stocks top biotech funds and hedge funds own and when to sell the rips. And hopefully you won't be caught with your pants down when a big offering is announced smacking your stock down 30% or more.

The big question on everyone's mind these days is will inflation expectations keep declining allowing the Fed to cut rates?

Look at the US 10-year Treasury bond yield over the past month:

At 4.5%, it's lower than its 52-week high of 5% but not by much which tells me the bond market is still worried about persistent inflation.

This can all change in the second half of the year as the US economy slows and either we see disinflation again or stagflation if inflation pressures persist.

But I expect more choppiness this summer and the fall will be critical as we approach US elections.

In fact, in his latest weekly market wrap-up, Martin Roberge of Canaccord Genuity stated this regarding a summer of volatility:

After five consecutive weeks of gains, the S&P 500 has taken a breather. Undoubtedly, the spike in volatility associated with recent earnings reports is prompting investors to recalibrate their risk exposure. Moreover, the lack of breadth and low volume behind the May rebound in stocks is adding another layer of risk. Some nervousness is also palpable in the bond market, where volatility has picked up again, thanks to further Yen depreciation and the surge in Japanese bond yields, which is likely prompting the BoJ to intervene through the sales of US Treasuries. Elsewhere, currencies remain range-bound, but next week could bring some volatility as the BoC and the ECB have their monetary policy meeting. Investors are expecting a rate cut from both central banks. Last, most commodities are flat for the week except for copper (~-4%), where some of the froth is being removed. As we wrote last week, the mix of bullish speculative positions and the end of copper re-stocking in Shanghai argue for some consolidation.

Our focus this week is on the S&P 500 and the underlying bullish sentiment, which is a warning about bouts of market volatility this summer. Our Chart of the Week shows that bull minus bear percentage spread from the AAII investor sentiment survey (AAII) and Investors Intelligence (II). The former surveys individual investors and the latter professional investors. Both surveys are based on contrarian propositions meaning that one should act opposite to the balance of expert opinion and market trends. 

While the AAII and II surveys come on a weekly basis, our chart plots the 26-week average. By doing this, we want to come up with a “bullishness duration” measure. Our intuition is that when bullishness has been rampant for a long time, the odds are that the stock market is likely at the end of a long cyclical rally. Well, this is very much where we are today with the AAII and the II up to the 20 and 40 extremes, respectively. Our chart shows that when similar readings were observed in the recent past, equity markets eventually went through a corrective phase. While non-US equities will not be immune from a correction in US equities, we explained in our Mid-Week note that we are willing to ride out this volatility given inexpensive valuations and the rebound in global manufacturing activity likely to lead to a similar rebound in foreign earnings. More details on our view when we publish the June 2024 edition of the QS next Monday.

For his part, Francois Trahan stills sees a slowdown ahead and shows how the equity risk premium suggests poor returns for stocks ahead:

For his part, Rosie remains bearish and thinks inflation is coming down:

All I know is that equity markets are very concentrated and this typically ends badly when it ends.

We shall see what the second half of the year has in store. The only good news is it's an election year and both the US and Canadian government are spending money like crazy!

But that too can come back to haunt us if inflation pressures persist and growth slows materially.

Alright, bring on June, sell in May and go away didn't pan out so far.

Below, Mark Zandi, Moody’s Analytics Chief Economist, joins 'Closing Bell Overtime' to talk what's ahead for the Federal Reserve, the recent inflation read, if we will see a rate cut this year and more.

Next, Lori Calvasina, RBC Capital Markets head of US equity strategy, and Warren Pies, 3Fourteen Research co-founder, joins 'Closing Bell Overtime' to talk the day's market action.

Lastly, Cameron Dawson, NewEdge Wealth, joins 'Closing Bell' to discuss markets, the tech sector and the Fed's next move.

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