Sell In May or Market Bottom?

This is one major query that has been boiling on my forum, in facebook and in my emails for the last week.

In my April 2009 In Preview posting, I wrote:

 If patterns continue to hold true, we might have some hope for the coming Quarter. If things continue to be as predictable as March has been, then we could be looking at some gains in April and a pull back in May. And because Q1 failed to close above the december low of 8,118.50, the January Barometer is now in effect which points to a lower year ahead … I am rather certain that April 2009 will be bullish, albeit in a bear rally.

After writing that, everyone found a reason to be bullish as they made great gains from the April rally. But as expected, now that the honeymoon draws to a close, everyone is finding an excuse not to believe the bearish implications of May. Funny how no one ever asks me if I am sure or queries my analysis about a bull run. But when I call for a bear run, the response is always, “Are you sure?” .. “How do you justify that?” .. “What makes you think …”

Rather than focus on reasons to be bullish for which there are few, I’d rather focus on reasons to be conservative for which there are more. 

Unlike most analysts/economists out there, I am not so bullish about the current run in the market for many reasons. While they hype up the few reasons to buy, I find that there are way more reasons not to buy yet. Having said that, know that “reasons not to buy” does not equate to “Sell“.

With all the reports available to the public and what is written in them, it is too easy to see why this rally may continue its run. And it might. But who is to really know? My objective is to play it defensively until there is little or no doubt about the sustainability of this rally. There is currently too much doubt in the market and insufficient evidence to suggest otherwise, contrary to what the news would have us believe. Thus, to jump into this now is to anticipate and to anticipate anything is speculation and I do not gamble.

In life, the truth only comes to light after the fact. It is no different in trading and investing. That is why most investors don’t bother with market bottoms and traders are always too late to catch that elusive bottom. But that is for the attack-minded retailer. My defensive attitude to this is to wait and see. I am not bothered about missing the bottom as long as I get most of the ride up to the top. (The top – another topic for another day). And I am only interested in that ride up when there is no doubt and when the market is fully committed to the cause – when 3 trillion dollars of sidelined monies come flooding back into the market.

Between April and October of 2007, I became “unbullish” because there were obvious signs that the market and the American economy was starting to hurt. Today, I am becoming less bearish but still remain unbullish. This means that for the interim, I’m taking the market in short term trends and will take the ride where ever it goes. 

So here are my reasons for staying Bear, or at best, unbullish … 

H1N1 Pandemic

Since the start of the swine flu outbreak, there have been no less than 4 reports that I’ve read where various governments and the WHO had claimed that this thing was under control. And a few days after a report like that appears, the outbreak worsens.

The latest in the saga has been that Mexico is not recording any more new cases (for now). Yet in Asia, the damn thing is almost everywhere in single numbers now. History has proven that all it takes is a start in single numbers for those numbers to grow exponentially. In Europe and North America, those numbers have not stabilized as a previous report had claimed. Canada, Ireland and England have confirmed increasing numbers of cases. So while the news writes up no new cases in some countries, more cases are quietly emerging in more countries worldwide.

This is not something that is going to slow down yet. Not until very drastic measures come to the fore. The Avian Flu outbreak has taught us that. To take this pandemic lightly is the worse thing the world can do. 

Stress Test Delay

The delay in the results of the Stress Test by a week can’t be because of good reasons. If the results were good or even too good to believe, it would have been published. 

This leads me to believe that something has gone terribly wrong. To delay the results by a week, by requiring that much more time to come to a consensus, means that the ends are not meeting or that there are more inherent problems than initially perceived.

Whatever the reasons, a delay is never because the reasons are good. This, to me, is cause for concern.

Fed’s bond effort backfiring

The U.S. central bank has been buying U.S. Treasurys in an effort to keep long-term rates low. But yields are higher now than where they were before the purchases began. This effort, along with many other efforts to jump-start the economy, has been blowing up the government’s face. Yet they continue to plug away. Why do they continue with such desperate measures?

The issue is not about the “why” but more significantly, if the American economy and financial markets are truly on a rebound (as many analysts claim it is) then what are all these “jump start” efforts about? If the market is rallying on real belief, then why would the government still bother with all these failed exercises?

Earnings – Better than expected on worse expectations

Going back to my April 2009 In Preview posting, I wrote:

April starts the second earnings season which has traditionally been a good season in years past. This year, however, we might be forgiven for assuming that things are going to look pretty bad as companies pull back further on their guidance and report lower-than-expected numbers. But the truth is that the market will accept anything that is better-than-feared rather than react to worse-than-expected.

Earnings have been a saving grace for the market. But the not-so-obvious big picture is that companies have been beating expectations that have been revised down drastically, some as much as 75% lower than their December/January guidance. So while the market reads into what they want to believe, the big picture is that earnings suck. Let’s not even get into discussing their revenues.

Now here is the real problem … forward guidance Q/Q and Y/Y is worse. Let’s just randomly pick the DOW stocks that announced their numbers this season:

I don’t know about expert analysis but common sense tells me that when a company says that its future looks anything but rosy, it is not a reason to buy.

And while reports are writing up the “recovery” or stabilization of the housing sector, housing and construction companies have been largely providing downside forward guidance Q/Q and Y/Y.

With more DOW components on the line this week (C, DIS, KFT) together with some very significant large cap companies, I am expecting more of the same – better than expected on lowered estimates with no or poor forward guidance – and the market will continue to ignore the obvious and buy into the rumor.

March/April Rally based on buying lousy stocks

Most of the buying that has been going on in the market are for cheap stocks and stocks that have very little or no significance to market movement. The stocks that matter like DOW and S&P components seem to be getting shunned for lesser valued stocks as evidenced by the lower-than-average volumes on the DOW and S&P stocks. NASDAQ listed stocks tend to fare better in terms of volumes. It could be the reason why NASDAQ has been a little divergent from the other two benchmarks in recent weeks.

As long as Buyers stay away from the blue chips and large to mega capped stocks, this is a loud shout that the market is voting for no confidence.

Interest Rates stay down, so will the market

Once again, we get into the debate on the correlation between Interest Rates and market movement. I’m not going to bother discussing this. I’m just going to say that as long as Fed Funds stay down, the market won’t be going anywhere.

Employment – Non Farm Payrolls

This coming Friday sees the highly anticipated Non Farm Payrolls which are widely expected to be better than previous months. Now that is a dangerous state to be in because if NFP comes out under expectations – and anything worse than last month’s return will be disastrous – we could see some serious fear hit the market.

Worst 5 of 6 months coming

The next five months are the worst months of the two worst quarters of the year. Of course it can be argued that there have been years when this pattern was not realized. But the statistics haven’t favored the bulls for the greater part of 109 years of DOW’s charting history. 

Housing recovery vs market bottom?

Those who subscribed to my monthly reports at would have read about a certain indication of a market bottom relative to the housing sector. Those who read it will know that we’re not there yet.

I find it amazing that reports will hype up the housing sector as “recovering” or “bottoming” and even more amazing that the general public will buy into that hype without knowing the obvious. Yup, it’s in my report.

Technical Analysis

The S&P500 and the DJIA are still less than halfway up between the 50 and 200DSMA. NASDAQ however, is hovering just below the 200DSMA and looks the more likely to break above it than the other two benchmarks. But that is where the real test lies; the 200DSMA has historically been tough to break above.

The market always revisits its lows

After all that I’ve mentioned above, a “V” shaped recovery goes against everything that is pure common sense. I found a number of reports this weekend that hyped up the possibility of a V-shaped recovery. Green Shoots or not, all it takes is a drought to turn green shoots to bush-fires.

A “W” is a more likely recovery but too soon in my opinion. Logically speaking, with as much obstacles in the way as we’ve seen, it’s rather unrealistic to expect a W-shaped recovery. (Don’t forget that years ending with “0” have an outstanding bearish record that is more than just a self-fulfilling prophecy).

How about an Inverted Head and Shoulders?

 A   B

In figure A, it would seem that DOW already completed the left shoulder and head of the pattern. Now all that remains is the dip (right shoulder) that could complete the Inverted Head and Shoulders pattern and lead the market to eventual recovery. (The red line is my speculative peek).

Figure B is another perspective and one that I favor. The March low was the left shoulder and we should get a head going into May and the worse quarter (Q3) should see the completion of the right shoulder.

Whichever pattern you decide is the more likely, even if you consider the “W”, you can’t deny that the market will re-visit its March low before any talk of recovery can be taken seriously.

Patterns are a direct translation of attitudes. As long as attitudes don’t change, those patterns remain reliable. I like things this way because like Jesse Livermore said,

Wall Street never changes, the pockets change, the suckers change, the stocks change, but Wall Street never changes, because human nature never changes.


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Excellent reflections of the market Conrad. I’m already beginning to be bought over by the bulls and start to think that this rally might last forever… especially on Friday when Taiwan Index went up 6% and today when the STI went up just as much. Is this too good to be true?

“When the market is greedy, you should be fearful.” Warren Buffet.

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