Roughly 60 days ago, we wrote about domestic equities failing their respective cash bogey check. For those unfamiliar, the bogey check is a simple 1-to-1 relative strength (RS) test between a proprietary NDW representative and cash proxy MNYMKT. If this test favors the domestic equity proxy, we say that the group “passes” its cash bogey check. If this test favors MNYMKT, we would say that it “fails.” The reading uses a simple standard 3.25% scale. In plain English, if domestic markets underperform cash by nearly 10%, this signal will flip to a failure. The same is true for outperformance & flipping back to a passing grade. With the understanding that a mere 10% correction is enough to flip signals, it comes as no surprise that the trigger can come with a handful of headfakes throughout time. After all- most times 10% corrections are just that- until they aren’t.

Having rocketed off 2025 lows to close April, NDW’s domestic equity proxy flipped back into a column of X’s against cash, signaling a formal “pass” of its bogey check. The mere 57 day journey in O’s is certainly shorter the “average” column duration of just over 200 days (dating back to the mid 90’s) but is certainly not the shortest, either. While the mere .9% decline during the domestic equity “fail” may not seem significant performance wise, risk-averse clients following the bogey check would certainly be appreciative that they did not experience the near 16% further decline (at its worst) for the market throughout April. Oftentimes we are quick to judge the validity of a strategy solely on performance- without remembering the “intra-period experience.” Perhaps said more plainly, a strategy that prevents clients from getting nervous and selling at just the wrong time is worth its weight in gold. While there is certainly much to watch going forwards as to the overall health of domestic equities, sensitive cash triggers like the bogey check can be a good starting point for clients who can stomach smaller declines but have no appetite for the respectively rare 15%-25% drops.

Small caps have also improved quite notably of the most recent rally. After a turbulent start to 2025, the Russell 2000 Index (RUT) began to see some improvement in late April when it reversed into Xs and gave its first buy signal since January at 1,890. Since then, RUT has given two more buy signals on its default chart at 1,970 and 1,990, respectively. Now sitting roughly 16% off 2025 chart lows, the positive action does leave RUT at a bit of an inflection point. Around current levels is the negative trend line and several layers of resistance baked in up to 2,100. Looking back to 2023 & 2024, the 2,000 mark has been quite difficult for RUT to crack, and will undoubtedly be a battleground to watch as we move throughout May. From a relative perspective, RUT also saw improvements in other areas of the market, returning to a column of X’s on a 3.25% RS Chart against MNYMKT to close April… another net positive. All this to say, upside action has been productive- but the jury is still out on long-term improvement for now. 

The beginning of May brings what is known as the “seasonally weak” six-month period for the market. Last week, we published articles around "market seasonality" and strategies to consider that leverage this historical bias. As we covered, the May to November period has typically provided worse returns over time than the six months from November through April. Even though that effect has been more muted in recent years, the long-term picture remains the same. We could hardly hope to explain this bias, much less the severity over time, but the "strong six months" of the year have accounted for almost all the Dow's average annual compounded return since 1950. As we covered last Thursday, the average return of the Dow during the seasonally strong six months has been better than 7%, while the "other" six months have produced an average return of less than one percent since 1950.

Those who have been following our research for any length of time know that sector rotation is a key aspect of many of our strategies. With the seasonal bias of the market in mind, we began to wonder how individual sectors might be affected by the seasonality phenomenon. While we don't have the same longevity in terms of data for sectors as we do for broad market indices, we have observed performance biases within the past 20+ years, which we illustrate below using the 40 DWA equal-weighted sector indices.

The graphics below utilize our inventory of 40 DWA equal-weighted sector indices, which have been "live" for the duration of our study period (most have been published since 1998), as well as a handful of benchmarks tracking equity and bond markets. The study includes market data from April 28, 2000, through April 30, 2025, tracking the returns of each index in the seasonal periods (the weak period spans May 1 through October 31, while strong periods span November 1 through April 30 of the following year). The results are displayed in graphs sorted by the "median" return of each index during each seasonal side of the study period, as well as the "min" and "max" returns during the respective periods. We’ve included each graphic along with key observations from each seasonal period.

Key Observations – Weak Season (May – October)

• Performance is typically more muted across the board during the weak seasonal period.
• Only nine of the 40 sectors examined show a higher median return than the S&P 500 during the weak seasonal period.
• Some of those sectors have also shown substantial improvement over the past month. Biomedics, aerospace, waste, software, and computers are all in the top ten performing sub-sectors over the trailing 30 days (through 5/2), and tend to outperform during the seasonally weak period.
• Those nine sectors are a diverse make-up of industries without dominance from any one sector.
• The worst performing sub-sectors include media, semiconductors, steel and oil stocks. Oil has also shown notable underperformance over the past several weeks. It will be interesting to see if historical trends hold over the next few months.

Key Observations – Strong Season (November – April)

• Only nine representatives in our examination finished the last six months in the black, including precious metals, gas utilities, and protection/safety as the best performers.
• The average return across all representatives over the last six months was -5.6%, which was the worst average return since the strong period that ended in April 2022. The typical average return across all 45 representatives sits at about 8.3%.
•  EFA showed significantly higher returns over the past six months than it typically sees during the seasonally strong period. This point of divergence will be interesting to monitor moving forward.

Daily Option Ideas for May 5, 2025