The Big Picture

It’s one of the oldest market clichés; “Sell in May and go away, come again St. Leger’s day”, one that is often quoted because it’s works – sometimes.  Will this be one of those times?

Investors still haven’t emotionally recovered from the bruising of the last two summers, to say nothing of the pain inflicted on portfolios during the summer of 2008.  But since 1927, stocks have rallied 57% of the time between May and October.  Five out of the last seven years have produced gains for the summer.  Its just that the 23% decline in the Dow Jones Industrial Average in 2008, the start of the global financial meltdown, the 10% drop in 2010 followed by a 19% Dow drop in 2011 has many investors skittish.  My advice to “those in doubt” is to “get out”.

There have been some exceptions to the “sell in May” rule, most recently the 2009 summer bounce of 15% and a 40% gain for the full year.  2007 saw a modest gain of 4% for the May through September period while 2003 saw a 15.6% pick-up for the same period. 

However, today’s investors point to the recent selling that has followed good news.   We’re a little more than halfway through the first quarter earnings reporting season and of those reporting, 72.8% have been earnings expectations, yet stocks have sold off on the news.  Despite a strong week, the S&P 500 index is still off by 0.4% for April.  Year-to-date the S&P 500 is better by 11.6% and the long-term uptrend from October, 2011 remains intact, but is growing a bit long in the tooth.  The quandary for those wanting to sell is where to stash the cash?    

On the other hand, stocks are reasonably priced and recent tests of support levels were successful.  The S&P 500 bounced off of near-term support at 1391, with even more support all the way down to 1340. With Friday’s close above 1400, the stage is set for a test of overhead resistance at the 52-week high of 1422 and the May, 2008 high of 1440.

 It may be hard to ignore the herd mentality when it comes to selling in May, but it’s even tougher to time the market.  Not only do you have to be right on the entry and exit dates, but you have to take into account your transaction costs.   Those investors who chose to buy and hold the S&P 500 index from the low on March 9, 2009 have doubled their money, as the S&P is up 102% since then. 

I, Investor 

The economic backdrop remains encouraging if not robust.  Last week’s release of first quarter GDP data showed consumers riding to the rescue as government spending and business investment declined. Still, at 2.2%, the rate of growth reflected a pick-up in exports despite slowing global growth. The housing market also contributed strength to GDP for the second consecutive quarter, and suggests finally a bottoming in the beleaguered sector.   

This week, the earnings parade continues with reports from regional banks, energy and pharmaceutical companies , AIG and consumer giants Anheuser Busch, Avon, GM,  and Kraft Foods, Visa and MasterCard, just to name a few. 

The April unemployment report, due out Friday, dominates this week’s economic calendar.  Consensus is for the unemployment rate to hold steady at 8.2% with the economy producing another 160-thousand jobs.    

Data out the following week should confirm already released numbers.  March consumer credit data, tracked by the Federal Reserve, will tell us how much of March consumer spending was on credit cards, while Wednesday, May 9th’s release of wholesale trade figures is a part of business sales and inventory data. 

March international trade statistics and April Treasury budget data on Thursday join weekly jobless claims and export/import prices while Friday sees the release of the April producer price index and preliminary consumer sentiment data from the University of Michigan. 

So, instead of investing by clichés, watch the economy, earnings and Europe, as well as volume and volatility.  Until the market breaks down decisively, the bulls still have the upper hand.

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