Sell In May?

In my previous blog posting, I mentioned

I am upgrading my trading status to Conservative from Bearish.

That meant that I am no longer convinced that Puts are going to be as profitable as they have been in recent months. But it doesn’t mean than I’m not going to trade Puts anymore nor does it mean I will only be trading Calls.

I am neither bullish nor bearish now. Being Conservative means that I will stick to day trades and stay away from long term investments for a while more. It also means that I am waiting for more signs to tell me that the market is not irrational and is trending in one singular mind. 

All the current confusion in the markets yesterday led me to only one conclusion … there is a lot of psychological divergence prevailing in the markets … and all I need is ONE divergence to tell me not to trade. That is what I mean by conservative.

Let’s take the Sell In May prophecy into conservative consideration. To do that, I am taking the last five years’ April to May charts …

2004

After April, I would likely have thought that the April Rally didn’t work and patterns were changing. My psychology would have been shattered because I would have been long in April and lost out. In the worse case, I would have held on to those losses in the hope that since April didn’t rally, it is likely that May won’t sell off … and when the sell off starts, I find it too much to take so I cut losses as we break below 10,000.

A week later, the market rallies to my April break-even within a month. Damn!

This would have been a major loser if I had been in the market then. I did this analysis as a novice when I started later that year (2005) and came to the conclusion that one must never predict the market, no matter what the statistics say. Stats are only for analysis and drawing an opinion, not a trade.

You may have a different outlook on this. The point of this exercise is to put yourself into a mindset in April and then see whether or not it paid off after May. Charts are always easy to analyze in retrospect but now that we’re in the middle of this situation what is your current mindset? What is the market doing to your psychology right now?

Let us continue …

2005

In April, I’m long again only to get smashed in the second week. I cut my losses and remembering what happened last year (2004), I go short in May. It pays off because the prophecy fulfills itself like it did last year. I’m out with profits because I remember that May rallied (after the tank) last year and I won’t want to get caught in a naked unlimited risk position.

This, by the way, was what really happened to me. What would you have done in April and how would you have responded?

2006

I’m long again in April and it is a profitable ride. I take my money off the table in the last week of April and leave a few small long positions, remembering from the previous two years that the first couple of days in May are usually bullish. Again, the pattern pays off so I take my profit on the third day of May. The market continues its run up. The run is an “empty” one as internals are divergent. There is nothing to support the bull run and volumes are dipping. I go short because the May tanker had worked in 2005 and was what killed me in 2004. It is a solid profit. Once again, the pattern worked.

So now confidence rides high. I have a pattern that works more often than not. Still quite a novice, I go into the next year brimming with confidence knowing I have a damn reliable technique for this period in the market …

2007

In Feb, the market tanked on Shanghai Surprise so by April, I’m long again and I make a killing! I take most of my profits off the table by the end of the month and keep several small positions for the first few days of May. By the third day of May, I clean out my positions and get ready to short the market. Right on cue, the market tanks in the middle of the second week. I go short and put a stop at my bought price by the end of that day. The next day, the market reverses and I’m stopped out at break-even. I get ready to short again by the opportunity never comes. I wait and miss out on the rest of the May rally.

This was a classic case of trading by rules. I stuck to the pattern and stuck to my rules and it paid off. But my confidence took a beating because May didn’t sell down like it was supposed to. Now, I begin doubting the pattern. I shall be cautious in 2008 because I got lucky in 2007.

2008

We are in recession. Jan, Feb and Mar were major losers. Yet I held firm to my belief in the ever reliable April rally – May tank pattern. I go long on the day before April because from past experience, the first day of April tends to be more bullish than bearish. It pays off big time. But then the rally stalls. 

Not wanting to take a chance because of what happened in 2005, I take my profits off the table, leave a few long and place tight stops. By the end of the second week of April, I’m stopped out in profits while the market tanks. Remembering that we are in recession, I take some small long positions after the market recovers to breaks above the 12,700-12,750 resistance. Once more, I profit take on the second day of May and prepare to short the market. 

The market tanks the next day and I go short. At 12,750, I take some profit and leave some short with stops at 12,800. After getting stopped out in profits, I get confused because unlike previous years when May rallied back, this is a recession year – what should I do? Sticking to my rules, I stay away because I don’t know what to do. Lucky I did. If I had been long (like I was in the past), I would have been slaughtered.

Finally, as the market broke below 12,750, I shorted it once more and made another round of profits.

Please note that I am using the market as a reference to real stock trades. I did not trade the index but I used the index as a reference for my stock trades.

And now …

2009


“CAN YOU SMELLLLLLLLLL WHAT THE MARKET IS COOKIN?” 
… sorry, a little WWE joke … 

You all know I was long in late March and all of April. I took off all my positions last week and some of you know I shorted the market already. Could have taken some profits on those shorts on Friday but I stuck to my trading plan. Those shorts are now in the red with stops in place near 8,500. Yesterday completed the two bullish first days of May.

And now I get tons of emails asking me if I am sure that May will sell off. This is exactly why the April rally is sometimes known as the sucker rally – it plays hell with your psychology. We can’t possibly know how much more this rally will go or if it will go at all. Neither can we know if May will sell off because it didn’t happen in 2007. 

Remember folks, the May sell off does not mean that May will finish negatively. It just means that there is a stinker-tanker usually during the second week that I can make money from. 

If I am wrong, I have stops. 
Am I still bearish? No, I’m conservatively unbearish.
Will I reverse my shorts for longs after the tanker? I don’t know yet.
Is this the market bottom? Who the hell knows?!!? Heck, I wanna know too!


“WATCHA GONNA DOOO … WHEN THE MARKET RUNS WILD ON YOUUUUU!!”
… sorry, another WWE joke … 

The best we can do is the best we can do. We’re all vulnerable to the same issues but we can choose to react according to how we translate the information we have at our disposal. My job is to help you by providing one opinion. You have to draw your own conclusions.

I invite everyone of you to comment and sound off your opinions. We can all use some feedback now.

 

OBSERVATION 1:  I’ve noticed that no one bothers me when I give out bullish analysis. No one ever asks if I am sure about an impending bull run. However, when there is an inherent bear in the vicinity, everyone is asking;

So I would like to ask any Bulls here;

 

OBSERVATION 2: For the record, After the close yesterday, 43 companies published their earnings on Briefing.com. Here’s a breakdown of their results:

3 = Beat + upside guidance
5 = Beat + in-line guidance

10 = Beat + no guidance
7 = Beat + downside guidance

1 = In-line + downside guidance

10 = Miss + no guidance
3 = Miss + in-line guidance
4 = Miss = downside guidance

The market usually reacts badly when companies report anything less than a Beat with upside guidance. Plus, of the 43 companies mentioned, 41 of them had revised their estimates down by an average of 45% from their previous quarter’s target.

Lately, the greater part of Q2’s earnings season has looked like this where more companies are sucking in terms of their results and more importantly, their forward guidance. Yet we believe what we read about the market “recovery”? One report even mentioned the prospects of the equity market’s “Long term growth potential” – growth? when only 3 out of 43 companies provides upside guidance? Mind you, the upside guidance of the three companies are for QonQ and only one mentioned YonY. FYI, about half of those who beat expectations missed on revenues.

Draw your own long term conclusions.

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