Sell in May and go away? Not so fast, investors

The S&P 500 has rebounded nearly 10% in 11 trading sessions, with CFRA noting that the May-October period has averaged just 2% since 1945 but 7% over the last decade, including a 22.1% gain last year. Strategists say strong earnings, resilient U.S. growth, and easing U.S.-Iran conflict risks argue against a purely seasonal bearish stance, though midterm-year history and unresolved geopolitical and Fed leadership risks remain caution flags. Since World War Two, stocks have typically risen more than 8% in the three months after fully recovering prior pullbacks of 5.5% to 9.9%.

Analysis

The key second-order point is that the market’s rapid repair after a drawdown is itself a bullish signal: when indexes reclaim losses quickly, systematic and trend-following capital tends to re-risk rather than de-gross. That creates a self-reinforcing window where “bad seasonality” can fail simply because underpositioned investors have to chase strength, especially if breadth keeps improving and earnings revisions stay positive.

The more important near-term risk is not calendar weakness but a policy/geopolitical shock that re-prices rates and risk premia simultaneously. A renewed energy supply scare or a hawkish Fed transition would hurt long-duration equities, but the market is currently implying these are manageable; that complacency is the vulnerability. If the index can stay above the post-recovery breakout level into the next macro prints, forced de-risking should be limited, but a failed retest would likely trigger a fast air pocket in crowded high-beta names.

The contrarian take is that “sell in May” is probably the wrong framing: the real question is whether investors are already underweight risk after the shock and now need exposure back before summer liquidity deteriorates. Midterm-year seasonality matters most when momentum is weak; with momentum repaired, the historical pattern may be muted. The asymmetric setup is for a grind higher with abrupt downside gaps, not a clean seasonal correction.

From a positioning standpoint, this favors buying volatility selectively rather than outright net shorting equities. The best trade is likely a relative-value expression: own resilient quality/cash-flow compounders while hedging index downside from geopolitical headlines and rates volatility. If earnings remain intact and oil retraces, the upside squeeze can continue; if not, the market is vulnerable to a short, sharp de-grossing rather than a prolonged bear phase.

Key Decisions for Investors

• Buy SPY or QQQ call spreads 6-10 weeks out, financed by selling farther OTM calls; thesis is continuation of the post-drawdown chase, with limited premium outlay and defined upside if trend persists.
• Pair long XLP/XLV against short high-beta cyclicals or unprofitable tech via IWM/ARKK puts over the next 1-2 months; this captures the risk that a geopolitical or rates shock hits multiple expansion first.
• Initiate a tactical long in quality factor exposure (QUAL) versus small caps (IWM) for the next quarter; if volatility returns, balance-sheet quality should outperform while still participating if the market grinds higher.
• Keep a hedge on via VIX call spreads or SPY puts into the next macro/Fed headline window; the market is pricing a smooth path, and the convexity is in a downside gap if policy guidance surprises hawkishly.
• If the index holds recent breakout levels for two more weeks, add to equity beta rather than fade it; the highest-probability move is momentum persistence, not immediate seasonal reversal.