The average stock in the S&P 500 was up less than 1% in the month of May, but there were obvious winners and losers.  Basically, the stocks that had the most upside momentum coming into the month continued to post nice gains, while the stocks with the most downside momentum continued to post losses.

We can highlight this trend using our decile analysis of the S&P 500, where we break the index into deciles (10 groups of 50 stocks each) based on YTD return through April.  Decile 1 contains the 50 best performing stocks YTD through April, decile 2 contains the next best 50, and so on and so forth until you get to decile 10, which contains the 50 worst performing stocks YTD through April.

As shown in the chart below, the 50 best performing S&P 500 stocks through April were up an average of 3.85% in May.  The next best two deciles both averaged gains of more than 2.25%.  As you extend out towards decile 10, performance in May gets worse.  Stocks in decile 9 were down an average of 2.52% in May, while stocks in decile 10 — the 50 worst stocks YTD through April — were down an average of 6.57% in May.  That’s extremely poor performance given that the broad market was higher during the month.

Will we see some mean reversion in June or will the “trend-is-your-friend” trade continue?

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