By
Dave Moenning on May 10, 2017 08:54 am
From
a near-term perspective, it appears the sideways consolidation phase continues
for the broad market while the NASDAQ just keeps on keepin' on. And with the
Comey firing causing a stir in D.C., it isn't a stretch to assume that the
sideways action could stick around awhile.
From
a bigger picture standpoint, the question at hand is whether or not the bulls
will be able to break out of the trading range that has been in place for nearly
11 weeks. For clues to the answer in situations like these, I like to look at
the macro backdrop, the historical tendencies, and my market models.
So,
with the markets quiet so far this morning, I'd like to do a quick and dirty,
back of the napkin, type of review of the current market situation.
The
Macro View
From
a macro perspective, I'm of the mind that it is fairly easy to argue both sides
at this time. In short, the bulls are betting on blue skies ahead thanks to
policy initiatives such as tax reform while the bears point to valuations and
the idea that the economic data doesn't support current levels seen in the
market.
From
my perch, the bulls would seem to have a slight edge here. Earnings are rising.
The jobs market is strong, etc. However, at some point - and the timing is
always the hard part - expectations will need to turn into reality. In other
words, the hoped-for macro improvement will need to show up in both the economic
data and the "E" in the market's P/E ratio. Thus, the bulls would appear to have
a limited amount of rope to work with here because hope can only take markets so
far.
Taking
a step back even further, I would be remiss if I did not recognize that perhaps
the biggest macro factor at the present time is that the stock market remains in
a secular bull phase. As such, (a) I've learned that the bulls should be given
the benefit of any doubt, (b) the dips should be bought, and (c) any bearish
action is likely to wind up in the short and shallow category.
Sell
in May and Go Away?
Next,
let's look at the historical tendencies of the markets for clues as to what
might come next. There are actually two considerations here, the cycles and the
"Sell in May" idea.
Sell
in May and go away. It's one of Wall Street's most popular clichés. And while my
memory bank suggests that this tends to be of those rules that works when it
works, history shows there is some validity to the approach.
To
review, the idea here is to buy stocks on November 1 of each calendar year and
then sell to cash on May 1 of the following year. According to the computers at
Ned Davis Research, if one had implemented such a strategy, a hypothetical
investment of $10,000 beginning in 1950 would have grown to $699,220 before any
fees and/or trading costs by the end of 2016. Not bad, eh?
On
the other hand, if one had invested $10,000 in 1950 and done the opposite
(buying on May 1 and selling on October 31 each year), the hypothetical account
would be worth... wait for it... $8,604 at the end of 2016. Ouch.
Therefore,
it would appear that the "Sell in May" rule might be a good one. However, my
caveat would be to implement such a game only if one has a 60+ year time horizon
AND if stocks are in a secular bear cycle. In short, my take on the historical
data is this is when such a plan works the best.
At
the same time, it is worth noting that the markets have not performed
particularly well during the May - October period in the current secular bull
cycle. While there has really been no reason to "sell" in May, I note that since
2009 (when the current secular bull began), the S&P 500 has averaged gains
of 3.96% during the May - October period and 9.56% in the November - April
period.
In
addition, the S&P has declined during 3 of the last 8 years from May through
October and only once during the November through April time frame. And finally,
it is worth noting that the gains seen during the November - April periods have
been substantial, with 5 of the 8 occurrences seeing double digit returns.
The
takeaway here is that while the calendar would seem to favor the bears in the
coming months, the historical odds suggest the idea of buying any dips
experienced during the "Sell in May" period.
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