Nasdaq Market Has Perfect Bullish Historical Pattern – Don't Sell in May!

Don Dawson - Barchart - Sat May 18, 3:04PM CDT

"Sell in May and come back after Labor Day" is a well-known adage in the stock market that suggests investors should sell their stock holdings in May and return to the market after Labor Day in September. But, like so many market clichés, sayings that aren't supported by historical data are meaningless. An example is the upcoming Nasdaq seasonal buy with a perfect historical 15-year record.

Will 2024 be the 16th year of the perfect run?

Assets traders can use to participate

Multiple assets are available to participate in this anticipated bull run in prices. The Nasdaq futures traded on the CMEGroup exchange offer a mini (NQ) and micro (NM) contract. For equity traders, there is the exchange-traded-fund (ETF) QQQ. Options for futures contracts and ETFs are also available.

Traders may also use other stock index futures contracts and ETFs for the Dow Jones Industrials, S&P 500, and the Russell 2000. The table below shows how closely correlated these indexes are, allowing traders more choices in their trading vehicle.

Source: Moore Research Center Inc. (MRCI)

For the past 180 days, as of May 17, 2024, the Nasdaq market closing prices have been correlated to the other major US stock indexes 92-99% of the time.

Technicals

Source: Barchart.com

The daily chart of the Nasdaq ETF QQQ has maintained a solid, consistent uptrend since the end of the 2022 bear market. Last week, the QQQs made another all-time high.

Numerous opinions are circulating about why the stock indexes cannot continue higher. I question this rally because of the many headwinds from economic to geopolitical events. I've rarely made money trading opinions of the markets. But, in the end, the market is always right, and this dominant bull market uptrend tells us to remain bullish. Being long in uptrends has created more profitable trades than not.

The recent week in review

Last week, the leader was the Dow Jones Industrial, which made fresh all-time highs. The market drivers continue to be anticipated interest rate cuts and declining inflation. The recent Consumer Price Index (CPI) revealed that inflation had dropped from 3.5 % to 3.4% year-over-year. Considering these were government-generated numbers during an election year, perhaps take these numbers with a grain of salt.

As a backdrop to why the CPI numbers seem fabricated, the Producer Price Index (PPI), which are prices required to produce products passed on to the consumer, came in at .5% month-over-month with a forecast of .2. 2024 has seen 3 out of four months with strong PPI numbers. Eventually, these increases will need to be pushed onto the consumer. Perhaps after the election, we will see these increases in the number of already expensive products consumers face.

Interest rates

The elephant in the room is in the interest rate direction. Since Chairman Powell indicated 4-6 rate cuts in 2024, the markets have seemed very gullible since December. Does anybody remember when the market told the Federal Reserve what to do?

Since the new year, each Fed meeting has seen that the economy and inflation trajectory do not support this big mistake Chairman Powell tried to influence the markets with.

Source: CMEGroup Exchange

The recent CMEGroup Fed Watch tool has traders believing there is a 49% chance of a rate cut in September. Remember that the same optimism was seen in the upcoming Fed meetings in January, March, and May. The stock market believes the Fed will cut rates with each forthcoming meeting. It's like picking tops and bottoms in markets; eventually, you're right if you stay solvent.

Seasonal pattern

It's important to note that while seasonal patterns can provide valuable insights, they should not be the sole basis for trading decisions. Traders must consider other technical and fundamental indicators, risk management strategies, and market conditions to make well-informed and balanced trading choices.

MRCI research has found a data-proven 15-year historical bullish pattern for the Nasdaq and other equity markets due to their significant correlation, unlike the market folklore of "Sell in May and come back after Labor Day" with no supportive historical data.

Let's explore this unique pattern and see if it is something you may be interested in trading.

Source: MRCI

The seasonal chart reflects the 15-year seasonal pattern of prices (blue line). Notice the significant momentum that has come in the past during July. The bullish optimal seasonal window begins on or about May 24 and ends approximately July 29. The seasonal window is open for approximately 67 calendar days, allowing traders to trade in and out of bullish positions or possibly hold for this period if your analysis supports the trade idea.

MRCI has historically found this window profitable for 15 of the past 15 years, including the 2022 bear market. Interestingly, the fact is that during these past 15 years, two of the years did not have a daily closing drawdown. As volatile as the Nasdaq can be, that is impressive.

Source: MRCI

The results above are for the Emini Nasdaq futures contract. If you use the micro futures contract, the results will be 1/10 of the value. Your trading capital for micro futures would also be 1/10 of the Emini Nasdaq futures contract.

In closing…….

While the adage "Sell in May and come back after Labor Day" is a well-known market saying, its lack of historical support makes it less reliable for strategic trading decisions. Instead, a more prudent approach might focus on data-driven insights, like the upcoming seasonal pattern with a perfect 15-year record for the Nasdaq. With various assets available, including Nasdaq futures, ETFs like QQQ, and options, traders have multiple avenues to participate in the anticipated bull run. A blend of technical and fundamental analysis and sound risk management is essential for successful trading. Will 2024 mark the 16th year of this remarkable trend? Only time will tell, but history certainly sets an optimistic precedent.

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On the date of publication, Don Dawson did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.