Sell FTSE in May and Go Away or Stay and Wait for Record High?

The April rally in the FTSE 100 could be fading even if the country manages to technically avoid a recession as UK's blue-chip index trades over 2% lower. Will this May be any different?

Unable to Break New Ground So Far

With the FTSE 100 down so far in May, the adage of "sell in May and go away" has come back. Historically, the index has returned an average negative growth in the May-to-September period. However, more summers have seen the index rise, suggesting higher volatility is at play. The month with the highest risk of catching a drop in the stock market is June, according to data compiled since 1986. What could really put a damper on FTSE this year?

Energy companies, led by majors BP and Shell, make up 13% of the weighting on the FTSE and are the largest component, followed by health care. Shell and AstraZeneca are practically tied as the two largest components of the index. The latter is seeing headwinds for the coming year as it expects a significant decline in revenue from covid-19 medicines. BP and Shell are facing the prospect of declining revenues as demand for oil is seen under pressure in the coming months. The initial boost to demand expected from a reopening in China doesn't appear to be materialising, and crude prices have fallen despite massive voluntary production cuts by OPEC+.

Patience May Pay off in the Future

About three-quarters of FTSE 100 components' revenue comes from overseas. The IMF's most recent report warned of a substantial slowdown in the global economy this year. It also predicts a drop in inflation thanks to stabilising commodity prices - which is a worrying predictor for many FTSE large companies such as those above, but also Antofagasta and Glencore. The shock to the banking system from higher interest rates has kept the third largest component of the FTSE 100 from breaking out to the upside.

With the index's major components facing global challenges, the domestic situation isn't particularly auspicious. The persistently high inflation has kept the BOE raising rates, potentially having to keep tightening while its peers pause. The Treasury now expects to manage to avoid a full-blown recession, but with growth barely at 0.1% over the last quarter with inflation in the double digits, the UK might be in a potentially worse situation: Stagflation. Of course, that might be remedied by a couple of months of reports showing the cost of living crisis was coming to an end. But that would still mean traders might have to wait until the summer for another attempt to break the FTSE's record.

FTSE in Broadening Wedge

The current structure from April's top at 7940 resembles a broadening wedge with high accuracy, suggesting the drop to 7700 might not be the end of a potential correction forming. This makes record highs possible while implying yet another downward leg below 7700, with a typical target settled by the 100% extension of the preceding move: near 7500. A reversal towards 8k and perhaps fresh record highs could begin once the top trendline breaks and the move above 7820 has more chances to happen.

Key Takeaways

The FTSE 100 index is down in May, leading to the return of the phrase "sell in May and go away", but June is the riskiest month for a drop. The energy sector, which comprises 13% of the FTSE 100, is facing declining revenues due to falling demand for oil. Other large companies, such as AstraZeneca and banks, face challenges. With the global economy expected to see a substantial slowdown, and the UK facing stagflation, a little patience may pay off.