Is It Time to Sell in May and Come Back Another Day?

Warning shots are being fired.

For the first time in many weeks one of our indicators has delivered a sell signal. Our market leadership model needle is pointed at sell. We also noticed the breakdown on the charts as the NASDAQ crossed under the S&P 500 in terms of performance. The NASDAQ has led the way during this rally up, pay close attention to the lead dog. If it stops pulling the sled, eventually the sled stops moving in that direction.

Despite the markets' continued push upwards, our momentum models lost traction for the 3rd week in a row. For now it is still in buy territory, but one or two soft days and it will be in real danger of pointing at sell too.

Our real fear is that the indexes trade in what we call a triangle pattern (see chart below). We saw this same pattern in our Stock Market Report on June 12th of 2008 and warned investors to get out when the DOW Jones Industrials were at 12,200.

Our call comes a lot earlier in the chart pattern this time which leaves us some wiggle room. We would be very careful in the days ahead and think about pulling some profits off the table. Investors might be wise to hedge against any fall in stock prices by putting some dollars to work in a reverse ETF. ProShares Short QQQ (PSQ) will return the opposite of the daily performance of the NASDAQ-100 Index®. If the index goes down PSQ goes up. For more excitement, ProShares Ultra Short QQQ (QID) doubles the fun.

A more market neutral trading strategy or hedge would be to buy the ProShares Short QQQ (PSQ) (shorting the NASDAQ) and buying SPDR S&P 500 ETF (SPY) (long the S&P 500). If the market falls and the NASDAQ falls faster than the S&P 500, you will profit. If the markets rise and the S&P 500 outperforms the NASDAQ, you will profit. Earlier we noted that the NASDAQ crossed under the S&P 500 performance wise.

Remember the old saying “go away in May and come back October’s last trading day.” The dog days of summer are here.

UPDATE: Looks like Merrill’s ex-economist agrees with us that the stock market could be overvalued.

Comments

[RiskReturnO...:]

Other warning signs include underperformance by sectors outside of Tech that have led the market up: XLY (discretionary), XLB (materials), and XLF (financials).

For market timers, perhaps time to take some profits on SPY, or hedge with healthy dose of SDS.

For sector rotation players, time to long XLV (Health Care) and short XLB (Materials) as a hedge. Global growth is being overpriced, while Heath Care is being oversold over concerns about Obama policies.

May 11 12:11 PM

[Not Jerry A...:]

Isn't it "sell in May, go away" ?

As in take little Tommy and Boomer to fat camp during the summer months?

May 11 03:54 PM

[thiazole:]

I agree with the idea that the Nasdaq is usually a short leading indicator for the rest of the market, but there have been no legitimate signs that the Nasdaq is falling relative to the rest of the market yet. This call is premature. Just today, the Nasdaq is trouncing the other indexes. Wait until you at LEAST see the S&P gain 5% against the Nasdaq and even then you will probably have a solid month to act before the market crashes.

May 11 03:59 PM

[Anthony B:]

It could just be that nasdaq was ahead on the way up, is ahead on the pullback, and will lead on the way up again. Too early to tell, but that's what today indicated, could easily get burned short Nasdaq and long S&P.

May 11 05:28 PM

[aarc:]

Compq is more likely a bearish expanding flat on the weekly chart rather than a triangle. It still has a potential to morph into a time-consuming triangle but at this stage it is clearly an expanding flat similar to that what DAX is forming on the weekly chart. Expanding flat is an A-B-C pattern with 3 legs while a triangle is an a-b-c-d-e pattern with 5 legs. Probability of triangle forming is much less than that of flat patterns.

There is a major problem here. Compq is basically "done" already meeting the minimum requirements of expanding flat pattern and should start going down to potentially minor lower low.

However, Compq can still go up to 2066 from the current price of 1731 and can still be considered an expanding flat, or rather an extended expanding flat. Extended expanding flats do have higher probability of being a completed leg of a triangle. Compq will need to go over 1818.47 to be considered as an extended expanded flat. If that happens then count the current expanded flat that has started to form since Nov 2008 as the a-wave of an a-b-c-d-e triangle.

We don't know what is actually going to happen. Those scenarios are the highest probability at this stage.

Dow Jones and SnP are still undergoing the spike rally after forming the running triangle on the daily chart that has started forming late April and has completed mid May. The running triangle was the cause of the spike rally that we have witnessed during the last 2 weeks. (see my previous blogs on the running triangle for SnP before the spike rally has started).

Over-all, highly unpredictable result because the Compq will more than likely have already completed the expanding flat and is due for the next sell-off anytime soon - unless prevented by the spike rally by Dow Jones and SnP.

SnP has a spike rally target range of 956 to 1029. My target is basically 982 with or without the spike rally. The running triangle and the ensuing spike rally made the target 982 much more complicated. I am now analyzing Dow Jones, SnP and Compq structural formation on the daily and intraday basis but so far no indication that the spike rally has already ended or is close to approaching the terminal stage.

Spike rally is characterized by extremely shallow pullbacks and usually does not respect momentum indicators of divergence sell signals and oversold conditions until it has finally run it's course. It is basically an aberation that happens rarely but such an event to behold once it happens.

We will know when the spike rally has gone it's course once SnP and/or Dow Jones go into a deeper run down or more than 3 days of strong sell-offs.

A definitive answer with more than 80% probability chance the spike rally has already ended is if SnP goes down below 866 from the last high of 930 - for speculative purposes.

It is not done until the die had been casted.

Too many traders are still expecting Dow Jones and SnP to test their daily 200ma and are more than willing to buy any minor pullback. While Compq is still trying to use same moving average as a pivot rather than a resistance.

May 11 05:46 PM

[InvestBaboo:]

You say:
********
For the first time in many weeks one of our indicators has delivered a sell signal. Our market leadership model needle is pointed at sell. We also noticed the breakdown on the charts as the NASDAQ crossed under the S&P 500 in terms of performance. The NASDAQ has led the way during this rally up, pay close attention to the lead dog. If it stops pulling the sled, eventually the sled stops moving in that direction.
********
NASDAQ has had 8 weeks of uptrend in the chart and three days of underperformance is enough fo you to declare an end to the rally. Some chartist you are! Today techs showed exceptional strength. If they keep it up tomorrow then will you republish the article saying the needle has just moved to a Buy? Maybe your chart buy/sell meter is broken in like those old cars from the 50's.

May 11 08:44 PM

[The Corret ...:]

We don't create the news, we just report it. We use a 10 week moving average, so 3 days a trend doesn't make. When it turns to sell, it is what it is. Also on our charts compared to the S&P, the NASDAQ dipped under for the first time in a long time.

Nothing in the market is guaranteed, but when you find something that works, you don't try to mentally undo what is done. You stick with it. In our view, it's better to be out of the market wishing you were in than in wishing you were out. Sometimes it's prudent to take a few dollars off the table.

May 11 10:59 PM

[aarc:]

To InvestB:

It is true, momentum indicators for Compq on the daily chart are screaming "sell" signals for several days already.

Problem is intraday momentum indicators for DJIA and SnP are screaming "higher highs" ahead after their initial spike runs to the upside. Intraday fast-Momos for DJIA and SnP were able to reach extreme high levels in the 60min and 120min charts and are now trying to consolidate such gains. They will need to counteract such extreme readings with appropriate sell-off to prevent the high probability of higher high prices. If the 240min chart reach new momo highs; then the spike rally will be sustained further. Now, what if the daily chart is able to achieve extreme high momo level in the days ahead? Momentum traders will be trying their might chasing SnP and/or DJIA as they try to squeeze as much profits from such a momentum run while those shorting the Compq at this stage will more likely be squeezed out of a high probability trade by not considering how SnP and DJA are performing.

Using Elliott Waves analysis on intraday charts also shows missing waves to the upside, meaning - they are not finish until the wave-forms have completed. As for the daily charts, I don't know what high probability scenario will happen beyond a few days run. Let's see how the 240min mono will perform first.

Fighting such momo indicators and the EW wave-counts for DJIA and SnP is the better way to lose money.

Also, the daily 200ma is still acting as a magnet for SnP and DJIA. Fibo confluence resistance levels are still in the mid 900's to high 900's for the SnP and the high 8000's for DJIA. Nothing in the short term to stop them cold except perhaps extremely bad news, something you cannot rely on until they do happen.

But like what I said previously, the Compq overbought condition makes the job of analyzing the markets a lot harder this time around.

Play it safe if you don't have enough technical knowledge or experience to be able to overcome such conflicting signals.

DJIA vs Compq conflicting signals on intraday and daily charts basis did happen most of the time when the markets were in such a mess with SnP usually the referee or arbiter.

However, this time around it is DJIA + SnP vs Compq.

Not a fair fight, is'nt it?

May 12 03:10 AM

[terryg8:]

The economy, the deficit and looming inflation, the jobs numbers, what seems to be a new round of foreclosures but this time in non sub prime loans, weak GDP, and just about all economic news has to lead anyone with any experience to believe that the only positive out there, the stock market, is not going to hold up.

I took my profit in my long positions last week and bought both SDS and QID. Monday hurt but I think we are in for a hard summer for stocks. I want to profit on that even as I profited in this sucker’s rally.

I may be wrong, but cannot see anything that will take this market much higher.

May 21 12:28 AM