Will April Showers Bring May Flowers?
2005 has unfolded quite differently than many expected (us included). Weakness hit the Markets immediately, with the major indices down 3 of the first 4 months of the year. Might all this market rain beget a blossom of stock gains? Perhaps, although we suspect that such a flowering will come from lower levels. More watering, some topsoil and a Wall Street favorite – fertilizer – just might do the trick.
A variety of both positive and negative factors are buffeting the gardens. The good news is that corporate earnings have been robust. Balance sheets are in good shape. There is plenty of cash – both in corporate coffers, and investor money market accounts – to be deployed. The price of Crude has eased, and wage pressure is nearly non-existent.
Unfortunately, the flip side offsets many of these positives. Our biggest concern is the technicals: the huge overhead supply is of far greater concern than Seasonality issues. The prior trading range – encompassing the post-election rally, from November to mid-April – now represents a major challenge. As we have previously mentioned, the formidable resistance is at Dow 10,400, Nasdaq 1990, and SPX 1165.
The reason this zone may represent a struggle is mostly psychological: the mid-April breakdown reflects a significant “attitude adjustment” by portfolio managers. It wasn’t until then that the gradual recognition of slowing GDP and rising Inflation finally worked their way into stock prices. We suspect that in order to return to that previous pricier region, a positive change of similar magnitude is necessary.
Since we mentioned seasonal pressures above, a few words on that adage might be in order. May has historically been the start of a period of relative weakness. We would be remiss, however, if we failed to point out that “Selling in May, and then going away” has not generated positive returns over each of the past 2 years. Indeed, in 2004, we exhorted traders to “Sell in May (but Don’t go away).”
I expect we could see a similar pattern this year. The very oversold condition in August 2004 led to a strong move upwards – but the markets are not as oversold here. We could see a bounce back towards all that overhead supply. A failure at those levels would then set up a sell off into summer. That could generate the sort of panic selling which precedes a muscular rally into year’s end.
Where does that leave investors? A modest oversold rally could develop here, but one that is unlikely to crawl back into that prior trading range. We therefore remain sellers of any move towards the aforementioned prices. We await more advantageous levels to deploy fresh capital.
Our posture remains “Sell in May – but look to Buy on Independence Day.”
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If James Altucher is right, that June's Fed rate hike will be the last for awhile, and that after a period of inaction, they cut rates, would that alter your view?
Posted by: Chris | May 2, 2005 4:46:35 PM
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