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."
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 |
|(AA)||Alcoa Inc. Common Stock||16.70 4:00PM EDT||9.81 |
|(AXP)||American Express Company Common||46.02 4:01PM EDT||37.13 |
|(BA)||Boeing Company (The) Common Stock||73.08 4:02PM EDT||59.48 |
|(BAC)||Bank of America Corporation Com||13.47 4:00PM EDT||10.91 |
|(CAT)||Caterpillar, Inc. Common Stock||106.57 4:00PM EDT||54.89 |
|(CSCO)||Cisco Systems, Inc.||17.44 4:00PM EDT||16.97 |
|(CVX)||Chevron Corporation Common Stock||104.18 4:00PM EDT||66.83 |
|(DD)||E.I. du Pont de Nemours and Com||53.75 4:00PM EDT||33.66 |
|(DIS)||Walt Disney Company (The) Common||41.63 4:01PM EDT||30.72 |
|(GE)||General Electric Company Common||20.01 4:00PM EDT||13.75 |
|(HD)||Home Depot, Inc. (The) Common||37.76 4:01PM EDT||26.62 |
|(HPQ)||Hewlett-Packard Company Common||41.08 4:00PM EDT||37.32 |
|(IBM)||International Business Machines||163.25 4:00PM EDT||116.00 |
|(INTC)||Intel Corporation||19.76 4:00PM EDT||17.60 |
|(JNJ)||Johnson & Johnson Common Stock||59.94 4:00PM EDT||56.86 |
|(JPM)||JP Morgan Chase & Co. Common||46.64 4:00PM EDT||35.16 |
|(KFT)||Kraft Foods Inc. Common Stock||32.14 4:00PM EDT||27.49 |
|(KO)||Coca-Cola Company (The) Common||66.90 4:00PM EDT||49.47 |
|(MCD)||McDonald's Corporation Common S||76.66 4:00PM EDT||65.31 |
|(MMM)||3M Company Common Stock||92.37 4:01PM EDT||68.96 |
|(MRK)||Merck & Company, Inc. Common||33.56 4:00PM EDT||30.70 |
|(MSFT)||Microsoft Corporation||25.64 4:00PM EDT||22.73 |
|(PFE)||Pfizer, Inc. Common Stock||20.46 4:00PM EDT||14.00 |
|(PG)||Procter & Gamble Company (The)||62.89 4:00PM EDT||39.37 |
|(T)||AT&T Inc.||30.47 4:00PM EDT||23.78 |
|(TRV)||The Travelers Companies, Inc. C||59.69 4:00PM EDT||47.69 |
|(UTX)||United Technologies Corporation||83.98 4:02PM EDT||62.88 |
|(VZ)||Verizon Communications Inc. Com||37.64 4:00PM EDT||25.99 |
|(WMT)||Wal-Mart Stores, Inc. Common||53.52 4:00PM EDT||47.77 |
|(XOM)||Exxon Mobil Corporation Common||83.18 4:00PM EDT||55.94 |
I have opened a position in the ProShares UltraShort Dow30 (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.
Information was gathered from CNBC, Yahoo Finance, and respective company websites.
Disclosure: I am long DXD.