Intensifying Impediments Endorse the Axiom 'Sell in May and Go Away'

| About: ProShares UltraShort (DXD)
Excessive bullishness is commonly realized close to market tops. Currently, the Investors Intelligence Sentiment survey shows bullishness has soared to 57%, with bearishness tumbling to 15.7%. The divide of 41.6% is thought to be hazardous. The last time it reached 40% was in October, 2007, the top prior to the Great Recession.

The catalyst for the great recession was a crisis in the U.S. Housing market. I contend we are still dealing with the after effects of this macro-economic colossal debacle today, amongst a plethora of superfluous worldwide complications heaping atop one another faster than you can say “20% Correction”.

The Oracle of Omaha, Warren Buffett, stated on CNBC’s Squawk Box in 2008:

“Well, I think you're seeing the ripples go out from what's started as a crisis in home lending and the fact that we had a housing boom fueled by a lot of lending by people who didn't know what they were lending on. And that's caused enormous problems in the financial markets as people have started looking at these instruments which they thought were triple-A and they're finding out they're about triple-F and those problems have a way of spreading, and that caused the banks to want to start deleveraging in a big way. And when banks start deleveraging, that sends ripples out. So there's consequences to every pebble that's dropped in the ocean and we had a pretty big pebble dropped in.”

I surmise we are still feeling the ripple effect from that pebble along with a multitude of new ripples caused by recent events. The following is a list of the unlucky 13 would-be disparaging factors regarding the DOW 30’s ($DJI) future performance in the near term. The 13 potential detractors are the possible unending U.S. debt limit political face-off; the planned end of the Federal Reserve’s QE2 stimulus in June; the burgeoning Middle East revolutionary crisis; the swelling Japanese catastrophic cataclysm; the contagious European debt domino effect; the growing gargantuan U.S. budget deficit; the sluggish U.S. Economy – (home sales, durable goods orders down); rapidly rising Inflation; coming global central bank interest rate hikes; the deluging global energy dilemma; the stifling proposed austerity measures; the precarious potential earnings disappointments; and to top it off the "sell in May and go away" phenomena.

Much has been written describing most of these issues with the exception of the “sell in May and go away” so called myth. Let me enlighten you, it’s no myth, it’s a proven fact. The market’s seasonality, the established predisposition to create a majority of gains from November to May, and experience the greatest amount of losses in the contrasting period, is well documented. A study by the Massey University - Department of Economics and Finance, Albany and New Zealand Institute of Advanced Study entitled “The Halloween Indicator, 'Sell in May and Go Away': Another Puzzle” stated:

"We document the existence of a strong seasonal effect in stock returns based on the popular market saying Sell in May and go away, also known as the Halloween indicator. According to these words of market wisdom, stock market returns should be higher in the November-April period than those in the May-October period. Surprisingly, we find this inherited wisdom to be true in 36 of the 37 developed and emerging markets studied in our sample. The Sell in May effect tends to be particularly strong in European countries and is robust over time. Sample evidence, for instance, shows that in the UK the effect has been noticeable since 1694. While we have examined a number of possible explanations, none of these appears to convincingly explain the puzzle."

Please review the following illustration depicting the DOW 30s performance over the last three years confirming the seasonal trend.
Dow 30 ($DJI) 3 Year Chart

Below is a table documenting the closing price of each DOW 30 component on April 12th, the 52 week low share price and the current percentage variance. 28 of the 30 $DJI components experienced their 52 week low during the summer months of 2010 specifically in May, June and July. Many of the stocks have experienced significant runs since these lows. This appears to be a prime time for smart money to take profits.

With the Great Jim Cramer of CNBC's Mad Money taking a slightly bearish tone Friday by stating, "When oil soared in 2008, the U.S. economy plunged into a downturn that it's only recently started recovering from.” So with oil again surging into dangerously high levels, he recommends being cautious and raising cash. Cramer expressing a bearish tone, in my mind, is a huge red flag that we may be nearing an inflection point. When the omnipotent optimist utters a negative notion, take heed. Why temp fate? Protect profits and repurchase equities waning in the summer doldrums. No one ever went broke locking in profits. Review illustration below noting 28 out of the 30 DOW components hit their 52 week low during the upcoming summer months.

DOW 30 Component Price Performance Details

Ticker Company Name April 12th Close 52 Week low Percentage
Above Low
(NYSE:AA) Alcoa Inc. Common Stock 16.70 4:00PM EDT 9.81
(JUL 10)
(NYSE:AXP) American Express Company Common 46.02 4:01PM EDT 37.13
(JUN 10)
(NYSE:BA) Boeing Company (The) Common Stock 73.08 4:02PM EDT 59.48
(AUG 10)
(NYSE:BAC) Bank of America Corporation Com 13.47 4:00PM EDT 10.91
(NOV 10)
(NYSE:CAT) Caterpillar, Inc. Common Stock 106.57 4:00PM EDT 54.89
(JUN 10)
(NASDAQ:CSCO) Cisco Systems, Inc. 17.44 4:00PM EDT 16.97
(MAR 11)
(NYSE:CVX) Chevron Corporation Common Stock 104.18 4:00PM EDT 66.83
(JUL 10)
(NYSE:DD) E.I. du Pont de Nemours and Com 53.75 4:00PM EDT 33.66
(MAY 10)
(NYSE:DIS) Walt Disney Company (The) Common 41.63 4:01PM EDT 30.72
(JUL 10)
(NYSE:GE) General Electric Company Common 20.01 4:00PM EDT 13.75
(JUL 10)
(NYSE:HD) Home Depot, Inc. (The) Common 37.76 4:01PM EDT 26.62
(JUL 10)
(NYSE:HPQ) Hewlett-Packard Company Common 41.08 4:00PM EDT 37.32
(AUG 10)
(NYSE:IBM) International Business Machines 163.25 4:00PM EDT 116.00
(MAY 10)
(NASDAQ:INTC) Intel Corporation 19.76 4:00PM EDT 17.60
(AUG 10)
(NYSE:JNJ) Johnson & Johnson Common Stock 59.94 4:00PM EDT 56.86
(JUL 10)
(NYSE:JPM) JP Morgan Chase & Co. Common 46.64 4:00PM EDT 35.16
(JUL 10)
(KFT) Kraft Foods Inc. Common Stock 32.14 4:00PM EDT 27.49
(MAY 10)
(NYSE:KO) Coca-Cola Company (The) Common 66.90 4:00PM EDT 49.47
(JUL 10)
(NYSE:MCD) McDonald's Corporation Common S 76.66 4:00PM EDT 65.31
(JUL 10)
(NYSE:MMM) 3M Company Common Stock 92.37 4:01PM EDT 68.96
(MAY 10)
(NYSE:MRK) Merck & Company, Inc. Common 33.56 4:00PM EDT 30.70
(MAY 10)
(NASDAQ:MSFT) Microsoft Corporation 25.64 4:00PM EDT 22.73
(JUL 10)
(NYSE:PFE) Pfizer, Inc. Common Stock 20.46 4:00PM EDT 14.00
(JUL 10)
(NYSE:PG) Procter & Gamble Company (The) 62.89 4:00PM EDT 39.37
(MAY 10)
(NYSE:T) AT&T Inc. 30.47 4:00PM EDT 23.78
(MAY 10)
(NYSE:TRV) The Travelers Companies, Inc. C 59.69 4:00PM EDT 47.69
(MAY 10)
(NYSE:UTX) United Technologies Corporation 83.98 4:02PM EDT 62.88
(JUN 10)
(NYSE:VZ) Verizon Communications Inc. Com 37.64 4:00PM EDT 25.99
(JUL 10)
(NYSE:WMT) Wal-Mart Stores, Inc. Common 53.52 4:00PM EDT 47.77
(JUL 10)
(NYSE:XOM) Exxon Mobil Corporation Common 83.18 4:00PM EDT 55.94
(JUL 10)

I have opened a position in the ProShares UltraShort Dow30 (NYSEARCA:DXD) based on the above conditions. The DXD seeks daily investment results, before fees and expenses, which correspond to twice (200%) the inverse of the daily performance of the Dow Jones Industrial Average index. The fund invests in derivatives that Proshare Advisors believe should have similar daily return characteristics as twice (200%) the inverse of the daily performance of the index. It typically invests the rest of the assets in money market instruments. The fund is non-diversified. Please review the below illustrations of the DOW 30 and DXD One Year Charts.

DOW 30 One Year Chart
The ProShares UltraShort Dow30 (DXD) One Year Chart

I plan to keep this short position "insurance" trade on until a majority of the headwinds are resolved or a sweeping upward move occurs in the $DJI. My finger is glued to the trigger.

Information was gathered from CNBC, Yahoo Finance, and respective company websites.

Disclosure: I am long DXD.