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Are Investors Selling In May And Going Away?

Market Summary

U.S. stocks posted their largest weekly drop in more than two months last week as earnings reports were a drag, but the S&P 500 and Dow managed to close up for April after strong showings mid-month. The Nasdaq was the only major index to end the month in negative territory. Last week was the largest weekly drop for the Dow since the week to Feb. 12, and for the S&P and Nasdaq the declines were the largest going back to Feb. 5. For the week, the S&P 500 Index and Blue Chip-heavy Dow Jones Industrial Average both fell 1.3%. The Nasdaq fell 2.7% while the small cap Russell 2000 dropped down 1.4% for the week.

YTD Performance

A standard chart that we use to help confirm the overall market trend is the Momentum Factor ETF (MTUM) chart. Momentum Factor ETF is an investment that seeks to track the investment results of an index composed of U.S. large- and mid-capitalization stocks exhibiting relatively higher price momentum. This type of momentum fund is considered a reliable proxy for the general stock market trend. We prefer to use the Heikin-Ashi format to display the Momentum Factor ETF. Heikin-Ashi candlestick charts are designed to filter out volatility in an effort to better capture the true trend. Last week's question has not yet been answered "...the market was unable to break out of the top of its trading range...Now the question is will the break occur below the range..." Momentum is now in a downtrend which points to break below the range.

MTUM Daily Chart

Last week's observation stated "...the Nasdaq Index is lagging the large cap indexes...If the Nasdaq doesn't catch up with the other indexes it might signal upward price movement will stall out sooner rather than later..." The updated chart signals stocks upward trend since the February bottom is stalling out. You can see that all the major indexes are confirming a downward move.

SPX Daily Chart

The dollar dropped to its lowest level since June as weaker-than-forecast economic growth supported the Feds decision to keep monitoring data before raising interest rates. The greenback weakened versus all major currencies last week after data showed U.S. gross domestic product expanded in the first quarter at the slowest pace in two years. The Fed left interest rates on hold for the third straight FOMC meeting, while policy makers at the Reserve Bank of New Zealand kept their key rates unchanged, even as they signaled the possibility of further policy easing. This GDP number, while it's certainly important, may be taking a backseat to some of the other headlines coming from central banks around the world," said Omer Esiner, chief market analyst in Washington at Commonwealth Foreign Exchange Inc. "We're seeing the dollar down against most of its major rivals." An unexpected decision by the Bank of Japan to stop easing its monetary policy also contributed to the dollar's slide, which caused Gold prices to jump last week, bringing the precious metal's performance for the year to its best in three decades. The Fed left rates unchanged and made no reference to a June rate hike, and treasury prices responded by finishing higher for the last three sessions, with the benchmark 10-year yield posting its largest three-day drop in 2½ months.

UUP Daily Chart

Market Outlook

May begins what are considered the "Worst Six Months" for the stock market. A popular traders' axiom affectionately says, "Sell in May and go away." According to Thomson Reuters I/B/E/S, of the 311 companies that have reported quarterly results, 57% reported revenue above analyst expectations, compared with the long-term average of 60%. Earnings beats this season have been cheapened, with lower-than-usual expectations making for little fanfare with investors when companies top the Wall Street consensus. According to MarketWatch, investors are more mindful than ever of the low-expectations game this earnings season as they tend not to reward beats and punish misses more than average. So far, companies that have reported higher-than-expected earnings have only seen a 0.4% price increase in shares from the two days before the release to two days after the release, according to John Butters, senior earnings analyst at FactSet. That's compared with a five-year average of a 1.2% price gain. Companies missing estimates have seen shares decline an average 2.9% over the similar period, compared with the five-year average of 2.2%, according to Butters. In the chart below, energy shares exploded higher to start the 2nd quarter as oil and gas prices recovered from a serious correction. The next best performing asset group so far in the quarter is gold which has been on a historical run all year.

30-Day Performance

The CBOE Volatility Index (VIX) is known as the market's "fear gauge" because it tracks the expected volatility priced into short-term S&P 500 Index options. When stocks stumble, the uptick in volatility and the demand for index put options tends to drive up the price of options premiums and sends the VIX higher. The orange box in the chart below denotes the Volatility Index is trading range-bound. If the VIX does a confirmed break out of the range it might indicate that investors have already started getting in synch with the investing precept that ways "sell in May and go away".

VIX Daily Chart

The American Association of Individual Investors (AAII) Sentiment Survey measures the percentage of individual investors who are bullish, bearish, and neutral on the stock market for the next six months; individuals are polled from the ranks of the AAII membership on a weekly basis. The current survey result is for the week ending 04/27/2016. The most recent AAII survey showed 27.40% are Bullish and 28.60% Bearish, while 44.00% of investors polled have a Neutral outlook for the market for the next six months. Over the past four weeks the theme has been the same -; the AAII survey continues to support the current range-bound trend.

AAII Sentiment

The National Association of Active Investment Managers (NAAIM) Exposure Index represents the average exposure to US Equity markets reported by NAAIM members. The blue bars depict a two-week moving average of the NAAIM managers' responses. As the name indicates, the NAAIM Exposure Index provides insight into the actual adjustments active risk managers have made to client accounts over the past two weeks. The current survey result is for the week ending 04/27/2016. First-quarter NAAIM exposure index averaged 45.89%. Last week the NAAIM exposure index was 82.50%, and the current week's exposure is 74.19%. As we said last week "...The current NAAIM equity exposure is the highest since last summer. At this lofty level, it is reasonable to expect money managers to reduce the amount of equity in clients' portfolio especially considering signs that stock valuations are becoming excessive..." Portfolio managers' will probably cash in some profits as the market is stalling which should further reduce NAAIM exposure.

NAAIM Exposure Percent

Trading Strategy

According to the Stock Trader's Almanac, May has been a tricky month over the years, a well-deserved reputation following the May 6, 2010 "flash crash". It used to be part of what some people call the "May/June disaster area." From 1965 to 1984 the S&P 500 was down during May fifteen out of twenty times. Then from 1985 through 1997 May was the best month, gaining ground every single year (13 straight gains) on the S&P, up 3.3% on average with the DJIA falling once and two NASDAQ losses. In the years since 1997, May's performance has been erratic; DJIA up eight times in the past eighteen years (three of the years had gains in excess of 4%). NASDAQ suffered five May losses in a row from 1998-2001, down - 11.9% in 2000, followed by eight sizable gains in excess of 3% and four losses, the worst of which was 8.3% in 2010. Election Year Mays rank at or near the bottom, registering net losses on DJIA and S&P 500 (since 1952), NASDAQ (since 1972) and Russell 1000 and 2000 (since 1980). We suggest making sure stop-loss strategies are in place for all open positions and be prepared to ride out a flat market trend. Now might be a good time to cash in on unrealized gains and not get to greedy waiting on larger profits.

30-Day Performance Chart 2

Feel free to contact me with questions,


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