Seeking Alpha
Profile| Send Message|
( followers)  

The stock market reached another all-time high this week. Ho-hum. What's next? Dow 20,000 by 2015?

Last Friday, my friend Jack, a retired architect, came bicycling up to our local radio station where I hold forth every Monday and Friday afternoons after the market closes. He and I have been discussing stocks for several years, ever since he heard that I write these bi-weekly market commentaries for Navellier.

Well, I've finally decided to get back into the market," Jack told me, smiling. "I've been looking at my "watch list" of stocks long enough to decide which ones I want to buy," he explained, adding that, "I can't live on bank CDs. These stocks have the kind of steady, safe income and growth I need in retirement."

I'm not an investment advisor, but this is precisely the friendly advice I had been drumming into his head for four years. Ever since the crash of 2008, I had been trying to convince him to get back into the market, to no avail. He was always too reticent, licking his wounds from being slaughtered in real estate first, and then in stocks.

I probably shocked him when I instinctively recoiled at his triumphant announcement. Before I could edit myself, I reflexively said, "You're kidding, right?" When he assured me he wasn't kidding I said, "Jack, maybe you waited too long. Now may not be the time to go 'all in' all of a sudden. This is the time of year - and the time in a long bull market - when there may be a correction. The market is far 'safer' when it is lower, when price/earnings ratios are around 10. At times like this, you have to be far more selective."

Investor Sentiment is Usually a Contrary Indicator for Stocks

Alas, Jack's decision to re-enter the market at its peak is all-too-typical of how the general public tends to wait for new highs before joining the bullish parade. For four years now, many investors have opted for the "safety" of low-yielding Treasury bonds or bank CDs over the "risk" of the stock market. Only since January of this year has the general investing public begun to stream back into the market in a big way.

The Dow's 13% surge since January has mostly been a product of the general public belatedly entering the game. Here's some evidence: The Investment Company Institute reported a net outflow of $13.2 billion from domestic equity funds in the last two weeks of 2012 vs. an inflow of $12.6 billion in the first two weeks of 2013. In recent weeks, that trend has been repeated on a smaller scale: An outflow of $1.7 billion in the two weeks before the March sequestration to a net $2.2 billion inflow in the last two weeks.

Also, the Consensus Online/Bullish Sentiment Index for last Friday, April 5 - the day Jack and I talked - was 77%, up from 64% in the week of January 18. The folks at Consensus Online (based in Independence, MO) consider 75% or greater an "overbought" condition. This is not to say that a market correction is guaranteed, but it is far more likely when 77% of investors are bullish on stocks.

Is Mid-April the New "Sell in May" Season?

In these columns, we have long said that institutional investors are getting savvy to the annual cycle of stock buying and selling. For instance, the "January effect" now starts in mid-December and the "Santa Claus rally" starts around Thanksgiving. Now, the same thing is happening with the "Sell in May and Go Away" mantra. Historically, 98% of market gains come between November 1 and April 30 with the other six months being flat. Since the stock market often hibernates from May to October, some market timers unload in April to "beat the crowd" that runs for the exits in May.

For example, in 2010 and 2011, the market peaked right around the last day of April - on April 26, 2010 and May 2, 2011, respectively. But last year, the peak day was April 2 when the S&P touched 1422.38 (intraday) and closed at 1419.04.

We believe that long-term investors should not panic over the possibility of a 10% to 20% dip within a bull market. Market timing is tricky, at best. If you sold last April, how would you know when to get back in? The S&P is now up 25% from last June's lows. If you waited until October 31 to get back in, the S&P was already back to 1412, so you didn't gain much long-term protection by selling in April.

Seasoned investors know that these spring corrections are to be expected, especially after the annual last-minute funding of tax-exempt pension plans on April 15, so my cautionary tale (to friend Jack and you) is that market timing is usually futile, since these corrections are an unavoidable part of every bull market.

What Could Keep this Market Rising?

Of course, it's possible there will be no meaningful correction this spring. We'll know more as the current first quarter earnings announcement season progresses. From the latest GDP report for the final quarter of 2012, we know that pre-tax corporate profits hit a record high of $2 trillion, including $681.4 billion in profits earned abroad, according to economist Ed Yardeni, who also reminds us that analysts currently expect $125.45 in S&P 500 earnings next year, up 11.7% from $112.30 this year. This may be a recipe for a continually rising bull market. A 15 P/E on $125 of earnings could deliver an S&P 500 at 1875 next year.

In addition, all of the major central banks of the world are committed to money-pumping of prodigious proportions. The Bank of Japan just committed to doubling its balance sheet in the next two years. The U.S. Fed is adding about $1 trillion a year in new liquidity through quantitative easing, and Mario Draghi, head of the European Central Bank (ECB), vowed last July to do whatever it takes to defend the euro. With major central banks expanding together, the global recovery may continue to surprise pessimists.

I won't recite all of the other bullish factors I normally roll out at this time - technological breakthroughs, lean and mean corporations filled with cash, mergers and buybacks boosting earnings per share, etc. The bears can also roll out their long list of fundamental problems, but in the end, each investor must decide.

By now, "sell in May and go away" is such a long-standing piece of market lore that it has become a self-fulfilling prophecy. If traders anticipate a correction, they will likely lighten up on stocks, whether or not there are good fundamental reasons to do so.

Disclaimer: Please click here for important disclosures located in the "About" section of the Navellier & Associates profile that accompany this article.

Source: Is Late April The New 'Sell In May And Go Away' Target Date?