That Sell In May Thing Again

The price damage that has occurred to markets this last month indicates a very strong probability that stocks are range bound for the time being likely into some period after Labor Day.  Here's why I think this.

1.  Large amount of technical damage.  See yesterday's post below.

2.  Economic uncertainty.  2nd quarter earnings reports coming in early July may dispel some of this concern but there's a lot of time between now and the meat of earnings season which comes in mid-July.  

3.  Continuing concern with foreign markets.

4.  Seasonality.  We've spent an awful lot of time in the past discussing this.  Here's one of our original thoughts on this and for emphasis I'll repeat the part of that article that specifically addresses summer.  

"Stocks will fall of their own weight unless there are marginal new bidders for their shares. Summer is typically a down period for Wall Street as the news flow dries up {unless it’s bad news. It is amazing how many international crises begin in the late summer. Both World Wars, the Korean War, 9/11, the First Gulf War and the 2008-banking crisis are examples of this.} Summer is also when analysts begin to fine-tune their expectations for stock prices as clarity begins to enter the picture about year end economic activity. Stocks will also begin to discount any lower revisions or negative economic news during this period of seasonal weakness. Once this discounting process is completed stocks will usually begin to rally sometime in autumn. The cynical amongst us also know that the only print that matters for most money managers is the one shown when the market closes on December 31st. To put it simply Wall Street wants to get paid. So there is a strong incentive to boost share prices during the 4th quarter of the year." 

The chart above courtesy of Zero Hedge.com shows that once again seasonal patterns have thrust themselves into the investment matrix.  

5.  Markets will need interest rates to find some floor before they can begin to discount earnings in a new higher rate environment.  That will take some time I think as there has been similar technical damage to these markets as well.  Remember though that rising interest rates, particularly from the low levels we've seen is not necessarily a completely bad thing as long as rates don't parabolically rise higher from these levels.  Higher rates can indicate better economic activity.  

Tomorrow we'll discuss valuations and where we potentially see cones of probability for year end, twelve and eighteen months from now.  

They said sell in May.  They were right!!  {Source Zerohedge.com}

*Long ETFs related to the S&P 500 in client and personal accounts.