Sell in May? Not This Time 49 comments
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With trading in May finished, we can look back at the month in its entirety and definitively say the old market adage,”Sell in May and Go Away” was wrong as could be. The month of May was the third straight month of positive returns in the U.S. equity indexes, the first such streak since August through October of 2007. The S&P 500 finished more than 5% higher for the month, in comparison to the 9.4% gain in April and the 8.5% gain in March. The rally in equities has indeed been impressive as the S&P is up more than 25% in the past three months, and an amazing 38% from the low point in early March.
It was not just stocks that enjoyed May, but crude oil also posted a huge 29% gain in May, its largest one month gain since 1999. The price of crude finished the month just shy of $67 per barrel, even as OPEC decided that no further supply cuts were necessary. Oil was not alone either as in general commodities were all propelled higher by the devaluation of the dollar. The basic materials index (IYM) gained close to 14% on the month, which outpaced even gold, the traditional hedge against inflation as SPDR Gold Trust (GLD) was up about 10%. The combination of the dollar’s rapid decline and the prospect of economic growth on the horizon has propelled commodities to rebound quite strongly.
The question now is what to expect for the summer months ahead. At Ockham, we are not market timers and think that it is foolish for anyone to claim they know where the market is headed in the short term. However, here are some observations that we think may be important to keep in mind over the coming months.
The stock market is no longer cheap. An argument could’ve been made that the market was cheap in Feburary, March, and April, but it is increasingly hard to justify any longer. Remember, this is very different than saying the market is headed down, but we believe that the gains of the past few months are still vulnerable. According to Barron’s online, the S&P 500 is far more expensive than it was a year ago according to a standard price-earnings ratio. A year ago when the S&P 500 was in the high 1300’s the P/E ratio was about 22x, but given the massive declines in corporate earnings expectations Barron’s pegs the P/E at 123x! These numbers are as of May 25th so next week could go either way but you get the gist.
Our internal calculation of the S&P 500 valuation is not quite as extreme as Barrons, but it is hovering at about 46 times current earnings. Obviously, our earnings expectations have not fallen quite as far as Barron’s, but according to our estimates we are seeing earnings that have declined 79% since the peak in 2007 and 72% from one year ago.
The fundamentals of equities have not improved in the last few months enough to justify these gains, in fact most indicators have not improved much at all but the perception is that the worst is behind us and growth will ensue. That may be the case, and we certainly hope it is, but it demonstrates to us that the market is currently trading on emotion and psychology rather than based on fundamental improvements. Investor sentiment and consumer confidence have both improved markedly over the past three months. The hope of better days ahead has been a powerful driver and could continue until corporate earnings truly do start to rebound. However, if the economy hits a bump and fear, uncertainty, and doubt start to creep back into the picture the recent market rally could very easily turn to dust because it was built on sentiment and not fundamentals.
Both sentiment and fundamentals are a completely legitimate and necessary components to market action, but in comparison to fundamentals, sentiment can be extremely fickle. How long can “better than expected” be enough to carry the recent gains in the equity indexes? We are of the opinion that the current rally has been largely devoid of fundamental improvement, which makes it all the more vulnerable. At Ockham, we quote Ben Graham often, and this seems a very appropriate time to reference his Security Analysis: “Stock markets behave like a voting machine in the short term, while in the long term they act like a weighing machine.”
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On May 30 12:41 PM dividendmachine wrote:
> As a person who has made their living allocating capital over the
> past 22 years I can say that there has not been as many great opportunities
> for a lare cap investor since the early 1990s.
>
> However back then CDS paid generous rates and real estate was not
> feared like it is now
>
> Besides logic doesnt dictate where the market is going in the short
> term anyhow
>
> In 1997 the market has gone up 37.6 and 23 percent the 2 years before.
> Instead of pul.ling back the market had 3 years of 33.4 ,28.6 and
> 21 respectively
>
> Buy great stocks at great prices and reinvest the dividends in other
> undervalued companies and use compound interest and reinvested dividends
> to build adividend machine that will give you financial independence
>
On May 30 12:41 PM dividendmachine wrote:
> As a person who has made their living allocating capital over the
> past 22 years I can say that there has not been as many great opportunities
> for a lare cap investor since the early 1990s.
>
> However back then CDS paid generous rates and real estate was not
> feared like it is now
>
> Besides logic doesnt dictate where the market is going in the short
> term anyhow
>
> In 1997 the market has gone up 37.6 and 23 percent the 2 years before.
> Instead of pul.ling back the market had 3 years of 33.4 ,28.6 and
> 21 respectively
>
> Buy great stocks at great prices and reinvest the dividends in other
> undervalued companies and use compound interest and reinvested dividends
> to build adividend machine that will give you financial independence
>
The reason they pushed the price higher during the last 5 minutes was to teach the Short-sellers a lesson or to make sure the co is not being turned upside-down by these crazy shorts.
As you know, hundreds of co are being ruined by these crazy short-sellers !! Not good for this country.
Once more it is fact that the dollar is over valued based on purchasing power parity (PPP) thumbs down or not. It is a fact, it is not a subject of debate. That does not mean or imply movement in any particular direction. The fact does not change,
If you had done nothing but let the simple 100 day moving average for the S&P 500 be your guide for being aggressive or defensive, depending on whether the market was above or below this line, this is how you would have navigated the last two bear market debacles:
Allowing about a month or so at each cross point to see if the cross was for real, it would have had you
out October 2000 and absent during the carnage of the bear's
first half
in December 2001 and present during much of the rally into mid
2002
out April 2002 and absent during the capitulation carnage of
the bear's last half
in May 2003 and, like a genius, present during the start of a new
bull move
and for the current bear,
out November 2007 and absent during the first selloffs
in May 2008 for a little of the rally into mid 2008
out June 2008 and absent during the end of the world
in April 2009 and, like a lone genius again, present during the
current rally
There are periods where, if you only follow this rule, you must be out and quickly back in for brief episodes of benign market weakness that don't really hurt very much, but what old wives' tale, cute saying, or highly paid adviser could have guided and protected you any better?
- Sovestor.com
No, that isn't why they give you Thumbs Down.. It is more likely because of your actions like cut-and-paste a huge volume of questionable information from wikipedia. That is arrogant. DON'T DO THAT!! If you think that is interesting for our consumption, then include a URL to it. Just don't jam it ALL down our throats like you did!
1200% is 12 times! I can't think of any widely held stocks that has gone up 12X since Mar 4th, not any of the usual suspects like financials and materials. Care to drop some names?
On May 30 10:27 AM Mr.S wrote:
> I have been long since March 04/09. I went 100% long on that day
> and my portfolio is up a whopping 1200% to date. That is not a typo!!!
> I will stay the course until I see a breach of the 875 support on
> the S&P 500 or until the end of June. I expect the market to
> sell off in the next few weeks. All the report that came out so far
> doesn't not support this upward move. I also know fighting the tape
> is very futile. So I will not short until I see a clear change in
> trend. For now, ride the train while it lasts!!!
1200% is 12 times! I can't think of any widely held stocks that has gone up 12X since Mar 4th, not any of the usual suspects like financials and materials. Care to drop some names?
On May 30 10:27 AM Mr.S wrote:
> I have been long since March 04/09. I went 100% long on that day
> and my portfolio is up a whopping 1200% to date. That is not a typo!!!
> I will stay the course until I see a breach of the 875 support on
> the S&P 500 or until the end of June. I expect the market to
> sell off in the next few weeks. All the report that came out so far
> doesn't not support this upward move. I also know fighting the tape
> is very futile. So I will not short until I see a clear change in
> trend. For now, ride the train while it lasts!!!
My view is that 1 year forward earnings will be tremendously strong just as 1 year trailing earnings have been tremendously poor (thanks to post-Enron accounting regulations that put EVERYTHING through the P&L). As we know, the problems were one of demand (if nobody wants it, it's worthless). Improved trading conditions would mean the write back of those provisions booked in the last 12-18 months. As a result, there is potential upside surprise on a headline EPS basis.
However, core earnings will likely follow the path of the economy i.e. continued deceleration into 2010. When the focus turns back to core earnings i.e. growth vs survival, the markets will have to correct.
Sadly, timing it is difficult. Traditionally, markets traded 3-6months ahead of fundamental (expectations). Today, the markets seem to be trading on a trailing 3month basis. Very odd.
On May 31 12:40 AM SivBum wrote:
> Mr. S,
>
> 1200% is 12 times! I can't think of any widely held stocks that has
> gone up 12X since Mar 4th, not any of the usual suspects like financials
> and materials. Care to drop some names?
The fundamentals simply are not there, and the "Obama Hope Wagon" is starting to run on fumes, with almost no fundamentals to back up Friday's 100+ point runup. If you think that money - or loss of money - is a Republican or Democrat thing, then you should not be in this market.
This market is feeding on itself the past few days - market is up so consumer confidence goes up =- driving the market up, which then raises consumer confidence, further driving the market up... And it is all based on "hope".
On May 30 09:09 AM CJ-49 wrote:
> Let's face it, you either have the balls to invest or you don't ..
> or you are a sore loser Republican (in which case you'd rather the
> entire US and world economy was totally trashed rather than see Obama
> succeed - and you will not invest on principle!)
I think the market is overbought on thin volume recently. I could be wrong, but it is looking a bit scary for me right now, so I sidelined to about 90% cash on Friday. The big problem with such thin volume is that it takes a lot less selling to drive the market down a lot if nobody is buying.
On May 30 09:05 PM cyberfly wrote:
> If you look at some of the market leaders' ten minute charts, you'll
> notice major buy programs kick in towards the end of each trading
> session, that has been keeping the market indices above key support
> levels and in a light volume market. Without these buy manipulation
> programs, sell in may would have been a wise thing to do.
On May 30 02:07 PM CLH wrote:
> They will soon give up and buy. After the one year panic, there is
> little downside.
The prices of financial instruments have been impacted by the orders of large traders since the origin of the markets. They first move it to test support and resistance (and often to run stops) , and will then often go the other way. To think anything different is simply naive. (Have a look at the Wall Street classic "Reminiscences of a Stock Operator " to enjoy learning more on that one.) And, to think that such large orders should somehow be disqualified from the collective opinion which price always represents is utterly foolish. Trades against such moves are kamikazes.
Have the markets disconnected from fundamentals? It certainly seems that way. However, one can lose an entire wardrobe of shirts trying to fight the tape. Or, instead, one can learn to navigate the choppy waters and end up doing rather well. Nothing magic about it. Just plain ol' hard work.
The market will be turbulent for many years to come. On a macro view we're in an epic trading range. On a century-over-century basis the first decade is shaping up as the pause before another major run higher. With that as the backdrop, the S&P on the weekly is now setting up to rally much further. Watch the 930-945 area in the coming weeks. A daily push up through that area, would signal a rocket ride much higher. On the monthly, there's really nothing in the way until the 1200 zone. And, it is certainly reasonable to think that the really big boys have every incentive to make this happen. Think about it for a moment, it's their best shot at persuading all that sidelined cash back into the markets.
1. Their financial markets are less sophisticated, that protected them of derivatives, toxic assets etc.
2. They are not swamp in debt, most of the countries has a per capita debt ratio 8 to 20X less than average Joe.
3. They have sound public finances (Mexico, Brazil,China, even Russia is in better shape than US.
4. There is a clear danger of inflation ..big inflation, all that millions that US and Europe are injecting are in additon to the millions "waiting the right moment".
5. ENergy equation is basically the same, there is not a fundamental change in the foreseeable future.
Stocks will go up, perhaps NYSE will be in a different position but worldwide they will be up.
Regards.
On May 30 05:48 AM Donald Ingram wrote:
> You best look out the window at your neighbors!
>
> International markets versus the S7P 500
> The BRIC countries (Brazil,Russia,India,c...
> Russia up 72.1%
> India up 51.6%
> China up 44.6%
> Brazil up 39.7%
> USA S&P 500 up 0.22%
>
> Ah yup. "Better than expected" eh! Dismal showing. If you are solely
> invested domestically, you are losing money and don't even know it.
> Get into the international markets. That's where the REAL money is!
> Wall Street is just too crooked. Going to have another bad fall soon.
> Best to sell in June and get gone!
RED ALERT RED ALERT
My smugness can only mean one thing. A major market sell off.
> "The stock market is no longer cheap".
>
> This comment is only valuable if you believe in efficient markets
> and invest only in an broad market index fund.
>
> If you are creating your own portfolio, and the P/E in your stocks
> is low, then it matters little where the DOW or S&P is overall.
As anyone who invested in almost any stock in mid to late 2007 found out, the view quoted above is not only wrong it is disastrous!
When an era of leverage and overpricing ends and one of deleveraging and thrift take hold just about every asset imaginable will be, and has been, repriced.
BTW, such changes historically take a decade or two to really take hold and considering that the stock market is well over its historical trend average and its historical valuations it is quite easy to make the argument that "the market" will continue lower over the coming years, and that means the vast majority of stocks will continue to be revalued.
If your favorite stock has a "low" P/E you should ask yourself why: Are its revenues and earnings dropping with little upside potential in a weak economy? Is that 15 P/E really not so low in a market that can no longer be built on leverage? I only have to look at Wal Mart to see a stock that is tremendously overpriced yet considered cheap by many. Go to Yahoo to see the details: finance.yahoo.com/q/ks... This is a stock that could well have a 4 or 5 P/E ratio and probably will.
Google is a great company perfectly placed to gain even in this environment and yet it managed only a 6% YOY growth rate in revenue last quarter and carries a 30 P/E ratio. It could, and probably should be 15-20.
And then there are the bad comapnies....
arabianmoney.net/2009/.../