'Sell in May and Go Away' May Not Be a Good Idea This Year

The old "sell in May and go away" adage may be only partially true this year: Investors may sell a bit but aren't likely to stray very far after they do.

Oliver P. Quilla for CNBC.com NYSE Traders

Despite a massive April rally that gave the indexes their highest monthly percentage gains in years, market pros remain fairly confident even if they do expect some natural pullback to happen along the way.

"There's going to be some profit-taking. That's the kind of market that we're in," says Nadav Baum, managing director of investments at BPU Investment Management in Pittsburgh. "People are still convinced the world isn't in great shape. There are a lot of issues that are out there. But I'm not so sure that May is going to be a disaster month."

The Dow Jones industrial average gained nearly 8 percent in April as earnings season managed to avoid any major earthquakes, and the economic numbers showed at least tentative signs that a bottom was taking shape.

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Along the way, the broader S&P 500 improved more than 10 percent and surpassed several technical levels that traders were watching closely. The Nasdaq tech gauge is up the most, gaining more than 12 percent during the month.

Most importantly, perhaps, was Wall Street's ability to shrug off bad news--like Thursday's unemployment numbers and Wednesday's drop in gross domestic product--that not so long ago would have triggered major selloffs.

The resilient market psychology has some convinced that the ground has shifted on Wall Street.

"A lot of the old adages right now are kind of out the window given what we've seen happen," says Dave Lutz, managing director at Stifel Nicolaus. "The economic cycles have changed so much in the last 12 months that it's kind of difficult to pinpoint seasonality."

Lutz sees a market that could soon register in the mid-900s on the S&P.

Indeed, other technicians think the market is in prime position to buck some conventional trends down the road.

"Well if history is any guide—it’s never gospel—investors may be wiser to "turn a deaf ear this year,' " says Standard & Poor's chief investment strategist Sam Stovall, who notes that the S&P has rallied between May and October during or shortly after the 14 bear market bottoms since 1932.

The April gain will make the Dow's best monthly performance since October 2002 and its best April since 1999. The S&P, meanwhile, will show its best April since 1938 and top monthly gain since December 1991.

Consequently, the expected reaction would be for a pullback—perhaps a violent one considering the current market dropped 5 percent in one day less than two weeks ago and the movement drew barely a yawn from investors.

But Schaeffer's Investment Research, a Cincinnati firm that has taken a mostly contrarian approach to the various rallies since the bear market began, said investors anticipating a retreat could be surprised.

Historical trends show that when the S&P posts six consecutive weekly gains, the trend in the ensuing weeks is actually for market gains.

"Bullish momentum can last longer than most believe," Todd Salamone, Schaeffer's senior vice president of research, recently wrote to clients. "Therefore,  one should be open and positioned for this possibility."

If the market truly believes the recession is ebbing and it has weathered what could be the worst-case scenario from earnings, then things could be different in the seller's market that is normally May.

The Economic Cycle Research Institute, historically a pretty accurate predictor of trends, says the recession could end before summer is over.

"I can't imagine that we're not in an ongoing different dynamic," says Diane de Vries Ashley, managing partner at Zenith Capital Partners in Coral Gables, Fla. "All of 2008 should be viewed as a massive parentheses to everything we've ever known."

Adjusting to the gyrations that could come during the month will require some flexibility for investors who normally prefer a longer-term strategy.

"Looking at alternative investment styles is certainly a very healthy idea at this point," Ashley says. "This is not an eternal buy-and-hold situation. You have to have a true level of active management."

Likewise, Randy Carver, president of Carver Financial Services in Mentor, Ohio, also believes the market is in for a pullback, but he is holding steady with an assortment of index funds, tax-exempt bonds and Treasury Inflation-Protected Securities.

"Recovery isn't going to happen until the real stimulus kicks in," Carver says. "From an economic standpoint that's end of summer, early winter."

While BPU's Baum says he's not taking any money off the table, he believes that the first week in May will be critical to determine which way the market is moving.

"Greed is starting to trickle in a little bit," he says. "Once greed trickles in it's as big an emotion as fear. It will be interesting to see if the (sell in May) adage is real."

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