Don't 'Sell In May' (Or Go Away)... But Be More Selective

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Includes: ADRU, BNO, DBEU, DBEZ, DBO, DIA, DNO, DTO, DWTI, EEA, EPV, EURL, EZU, FEEU, FEP, FEU, FEUZ, FEZ, FIEU, HEDJ, HEGE, HEZU, HFEZ, HFXE, HGEU, IEUR, IEV, OIL, OLEM, OLO, RFEU, SBEU, SCO, SPY, SZO, UCO, UPV, USL, USO, UWTI, VGK
by: Louis Navellier

Summary

Near term, the stock market appears to be overbought after the DJIA and all 10 sectors of the S&P 500 rose above their 50-day moving averages last week as many taxpayers fund their pension plans before the April 15 deadline.

The European Central Bank (ECB) announced last Thursday that it is ready to use "all instruments" available, including further key interest rate cuts (from current rates at -0.4%) plus (possibly) more quantitative easing (QE).

There is a lot of confusion regarding what is happening to the crude oil market.

Reports of tightening supplies of distillates (e.g., diesel, heating oil, jet fuel, etc.) and Iran complaining about a shortage of tankers to boost its exports have contributed to helping crude oil prices firm up.

The S&P 500 is up 2.3% year-to-date and the DJIA is up 3.3%, but the NASDAQ is down just over 2%. Last week, the S&P 500 was up 0.5% and +1.5% for the month of April so far. Near term, the stock market appears to be overbought after the DJIA and all 10 sectors of the S&P 500 rose above their 50-day moving averages last week as many taxpayers fund their pension plans before the April 15 deadline. After the April 15 tax deadline, new pension contributions tend to slow dramatically. This is (in part) why so many folks begin to talk up their "sell in May and go away" theories during late April.

I don't ever favor "selling in May" (or "selling all stocks" at any time). Instead, I look for bargains within specific sectors or categories. Overall, I'd say some big names remain ripe for consolidation. First-quarter earnings are expected to be weak and expectations remain very low, but any company that lowers its sales or earnings guidance will likely be shot on the spot. As a result, I expect the stock market to become increasingly narrow in May. (Please note: I do not currently hold a position in NFLX or ILMN. Navellier & Associates, Inc. currently owns positions in NFLX and ILMN for some client portfolios).

I should add that BBB-rated corporate bonds yield 1.9% less than they did four months ago while the inventory of good investment-grade bonds available remains especially tight; so I expect that more investors will continue to turn to high-dividend-yielding stocks as an income alternative. I am also eager to see the latest stock buyback activity figures since Corporate America continues to sell low-yielding debt to retire its outstanding stock. I suspect that when we look back at 2016, stocks that offered high and reliable dividends buoyed by stock buybacks will be hailed as the biggest market winners of the year.

The View From Europe

Anytime you think America's politics or central banking shenanigans are sounding like Looney Tunes, take a look across the pond. The European Central Bank (ECB) announced last Thursday that it is ready to use "all instruments" available, including further key interest rate cuts (from current rates at -0.4%) plus (possibly) more quantitative easing (QE). The ECB desperately wants to ignite inflation, and the easiest way to do that is to weaken the euro, thereby pushing the price of imports up. Frankly, the ECB's latest statement sounds both clueless and desperate, and its rising desperation is frankly very scary.

The only reason the euro looks temporarily strong, in my view, is because European investors seem more comfortable with the euro versus the British pound until the outcome of Britain's June 23 vote is known. Britain will vote on June 23 on whether or not to exit the European Union (EU). British Prime Minister David Cameron is coming under criticism on many fronts. Last week, President Obama visited Britain to ask the voters and politicians there to remain in the EU. Obama was met with mixed reviews since many Brits find it odd that a lame-duck American President wants to meddle in their politics. Not too long ago, President Obama blamed the instability in Libya on British Prime Minster David Cameron in an Atlantic magazine interview (see "The Obama Doctrine," by Jeffrey Goldberg, The Atlantic, April, 2016).

Furthermore, U.S. State Department and CIA officials have been repeatedly cited as the source of the leak of the "Panama Papers," which embarrassed Prime Minister Cameron's family for allegedly having money in an offshore tax haven. This is not good for the personal relationship of Cameron and Obama.

Furthermore, the influential London mayor, Boris Johnson (an outspoken opponent of Prime Minister Cameron), was especially insulting to President Obama last week, tweaking the President for removal of a bust of Winston Churchill from President Obama's White House office. That was seen by some as a sign of an "ancestral dislike of the British Empire." In other words, the leading politicians in Britain stopped fighting with each other long enough to carp at President Obama instead. If Brexit passes on June 23, President Obama's visit last week may prove to have been the pivotal tipping point as British leaders asserted themselves and made it crystal clear that Britain no longer is America's (or anyone's) lap dog.

The Latest News From The Oil Patch

There is a lot of confusion regarding what is happening to the crude oil market. Reports of tightening supplies of distillates (e.g., diesel, heating oil, jet fuel, etc.) and Iran complaining about a shortage of tankers to boost its exports have contributed to helping crude oil prices firm up. However, the April 17 OPEC meeting in Doha, Qatar, was simply a disaster and only a three-day strike by Kuwait oil workers helped to temporarily keep crude oil prices artificially high. That strike by Kuwait oil workers is over now and experts are refocusing on crude oil inventories, where the situation is clearly one of oversupply.

Last Tuesday, the American Petroleum Institute reported that crude oil inventories rose by 3.1 million barrels in the latest week. The simple fact of the matter is that America's crude oil glut this year is higher than it was in 2015 and all previous years, so even though crude oil futures may be responding to small changes in production data, the excess inventories of crude oil are still overwhelming and may likely result in crude oil prices plunging in September when worldwide seasonal demand begins to ebb.

Disclosure: *Navellier may hold securities in one or more investment strategies offered to its clients.

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