Is the Tape Telling Us to "Sell in May and...?"
What started out as a hopeful end to the first positive month in the last three ended in disappointment Monday. Green turned to red. Optimism about earnings turned to fear that earnings have peaked. Hope for ongoing economic growth turned to, well, you get the idea. By the end of the day, the S&P had fallen 1.3% from the high and closed on the low. Awesome.
To be sure, there are lots of reasons for traders to fret these days. And the bottom line is the list of worries continues to grow as the sentiment in the market continues to sink.
There is trade and tariffs to contend with, rising rates, worries over a Fed mistake, slowing global growth, Korea, a whiff of inflation, the drama and political risk in D.C., and of course, Russia. All of which seems to be creating what can only be described as a "heavy" tape where buyers tend to be overrun by the sellers on a daily basis.
There is the fact that down volume has swamped up volume by a measure of 9 to 1 on eight separate occasions this year without a single intervening 9-to-1 up day (where up volume is more than nine times down volume). According to Ned Davis, this has never happened before without a bear market being present. Super.
Oh, and don't look now fans, but the calendar says it's time to "Sell in May and go away!"
According to the WSJ, the S&P 500 has gained just 0.3% during the May through October period over the last 20 years. This pales in comparison to the average return of 6.5% during the November through April period. And the data indicates that the weakest May-to-October periods have come during the mid-term year of a presidential cycle. Great.
There Is Some Good News
However, Tony Dwyer of CANNACORD Genuity (who I had the pleasure of sharing cocktails with last week at the NAAIM conference in Orlando), says that the old "Sell in May" adage may not hold up this year.
According to Mr. Dwyer, who is refreshingly level-headed in his macro approach to markets, we are currently enjoying a "nonrecession environment." Tony says that while we are indeed entering a seasonally weaker period for the market, this is not the time to actually sell out and sit in cash.
"When we looked underneath the surface in a nonrecession environment, we found that you've never had a negative market going into May and then had a negative May through September," Dwyer told CNBC. And with the S&P 500 negative for the year going into May, a loss over the "Sell in May" period would be a first.
"It's more likely you're going to have an up May through September, Dwyer says."
From a macro standpoint, I learned that Tony has one very simple, big-picture rule. "You never want to sell a positive stock market without an identifiable recession in sight."
So the question, of course, is if there is a recession in sight? The answer is, no. For example, my model that projects recessions currently sport a reading in the single digits.
The next question is what tends to precede recessions? To which Dwyer told the NAAIM attendees, "an inverted yield curve." However, Tony was quick to caution that while an inversion of the yield curve does tend to lead recessions, it does so with (a) a lag time of 19 months on average and (b) a mean gain of more than 20% in the stock market. Good stuff to know, right?
So, while it may sound like a contradiction, Dwyer says that the much feared inverted yield is actually a tactical buy signal that tends to last about a year and a half before the bears gain control of the game.
Finally, Dwyer reminds us that the stock market moves in the direction of earnings, which is "definitely going to be positive for the foreseeable future."
So... While pessimism currently reigns on Wall Street and there is a chance that stocks make lower lows in the coming months, I continue to believe that we're seeing a correction within an ongoing bull market and that as long as the economy continues to grow, the dips should be used opportunistically.
Thought For The Day:
The way I see it, if you want the rainbow, you gotta put up with the rain! -Dolly Parton
Wishing you green screens and all the best for a great day,
David D. Moenning
Founder, Chief Investment Officer
Heritage Capital Research
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At the time of publication, Mr. Moenning held long positions in the following securities mentioned: none - Note that positions may change at any time.
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