Stocks could have further to fall in May after this month’s market woes

Published Tue, Apr 30 20243:40 PM EDTUpdated Tue, Apr 30 20244:05 PM EDT

The stock market's woes may not yet be over. Stocks are set to close out their first losing month since October after recent reports of hotter inflation spurred fears of interest rates remaining higher for longer. The market's rout put a damper on the artificial intelligence-driven rally that defined the first part of this year. The S & P 500 is down by more than 3% this month, though it has still registered a more than 6% advance for the year. But many investors worry stocks have further to go before finding a durable bottom. They say stocks look overvalued even after the recent pullback, and they cite troubling headwinds for equities. Inflation remains sticky. Treasury yields are on the rise. Geopolitical risks abound. And, momentum indicators monitored by market technicians are flashing sell signals. "Typically, when you see a 5% drawdown, it's somewhat rare that it stops there. Typically, from 5%, it goes and mutates into something more in the order of 8% to 11%," said Mark Luschini, chief investment strategist at Janney Montgomery Scott. "So, we would expect more volatility and downside." Even so, the investment strategist said he is more positive on equities for the remainder of the year, saying a retest of the 4,800 level in the S & P 500 could signal a buying opportunity. He advised that investors raise their exposure to cyclicals, such as financials, industrials and utilities. 'Sell in May and go away' May has a reputation as a historically weak month for stocks. Investors who adhere to the strategy of "sell in May and go away" offload their equity holdings at the start of the month, coming back in the fall season to take advantage of a seasonally strong calendar period for stocks. In fact, the "Stock Trader's Almanac" shows that May is the start of the seasonally worst six months for markets, from May through October, when the Dow Jones Industrial Average gains 0.8%, on average. On the other hand, the best six months of the year, from November to April, average a 7.3% advance. Jeff Hirsch, editor-in-chief of the "Stock Trader's Almanac," said he's moved out of his positions in the Dow and the S & P 500 earlier this month, citing a sell signal in a technical indicator known as the moving average convergence/divergence, or MACD, earlier this month. However, he said he remains positive on equities for the remainder of the year, and advised that investors take the time to evaluate their portfolios. "It's not a sell and go away. It's not a do nothing. It's a reevaluate your portfolio. Get rid of losers, tighten up stops, limit your buying and being more cautious," Hirsch said. .SPX 1M mountain S & P 500 He noted he's added exposure to two bond ETFs: the iShares 0-3 Month Treasury Bond ETF (SGOV) and the iShares Short Treasury Bond ETF (SHV) . However, others had a more positive take on equities. Carson Group's Ryan Detrick noted that stocks have actually been higher in May during the last nine out of 10 years. He added that stocks tend to do well during the summer, especially in an election year. "The fact that we've got a decent year going into this period, and it's an election year, to us signals we're not anticipating a major, major weakness these next six months," he said.