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Sell in May and Go Away
If only investors had followed that old adage! The DJIA was only down 1.2% last week but was down 8% for the month, the worst monthly percentage drop for May since 1940. The S&P 500 and NASDAQ were both down more than 8% for the month of May. It remains to be seen if the correction continues or the bull market resumes. Although the uncertainties are greater than usual, investors are looking for any excuse to get back to viewing the glass as half full.
The milestones in the news a month or so ago are being reversed. Last week, it was the DJIA briefly dropping below 10,000. It came back later in the week to close at 10,137. The week before the S&P 500 broke below 1,100. It remained below the 1,100 milestone last week, eking out a two point gain. Even bonds are doing it. The 10-year Treasuries, which briefly went above the 4.0% yield mark in April, last week flirted with 3%. The yield on Wednesday closed at 3.19%, although by Friday it was back to 3.30%.
Sell-Side Sentiment Treaded Water Last Week
It may have been another week of market turmoil, but sell-side sentiment calmed down from the big changes of the prior week. In the prior week, the overall sentiment index rose 2.9% and five of the ten industry groups rose by more than 5%. Last week, the overall sentiment index was unchanged, but still in positive territory. Only one group, the seldom written about Utility industry, rose more than 4% last week.
The Triumvirate of Highest Rated Industries Remains the Same
For the past four weeks, the three highest rated industries by a good margin have been Industrials, Oil & Gas, and Health Care. The order within the group has changed during that period. Two weeks ago Oil & Gas skyrocketed from third to first within the triumvirate. Last week a 3% slide in sentiment for Oil & gas, coupled with a 2% sentiment gain in Health Care, pulled the three into a very tight race for the leadership position. Industrials and Health Care are at their highest level since the start of the First Coverage data base in March 2007. The current Oil & Gas peak is about the same as its December 2009 peak, although, still below levels in early 2008.
Sentiment for Financial Industry Registers Another Solid Week of Gains
Sell-side sentiment for Financials rose almost 4% last week. It was the fifth week in a row of rising sentiment for the industry. It still lags well behind the most favored industries, but May was a month during which Financials recovered about twenty percentage points of the 30% drop experienced in the prior five months. The high achieved in November 2009 before the recent decline started was the highest level the Financials had achieved First Coverage began tracking data.
Housing Double Dip Looks More Likely
In our week ago summary, we said the housing reports last week wouldn’t mean much because they would benefit from a spike upward as buyers tried to benefit from the tax breaks before their April 30th expiration. That was true with both existing and new home sales for April. But that was not the case for some other housing data reported for the pre-expiration period. April existing home inventories lengthened and building permits declined from March. Worse yet was that the first post-expiration data available has been negative. Weekly purchase mortgage applications have fallen in each of the first three weeks of May. All of this was going on while mortgage rates fell to near record lows.
For some time, a double dip in housing has looked like a good bet on the basis that foreclosures would rise again as another sequence of Alt-A et al mortgages flipped up to higher rates. Recent data may be indicating that if one ignores the fact that the tax-credit expiration fueled gains in housing sales and construction starts, housing in reality may again be slowing.
Market Will Be Riveted on Employment Reports This Week
There is no question that the market will scrub every bit of data in Friday’s employment report for hopes that employment growth is showing signs of improving. Will the employment numbers be enough to overcome renewed fears of a double-dip recession? Probably! The market is looking for about 500,000, but as long as the April employment gains are similar to-- or better than-- the 290,000 of March, the market may be happy. Also, don’t forget the weekly unemployment claims report on Thursday. The dilemma is that unemployment has to drop to generate better gains in home sales, but homebuilding is normally a key source of employment gains in an economic recovery. There may be a temporary burst of home building as the contracts that had to be signed by April 30th to get the tax break begin to get built but will it be enough to break out of the current chicken-and-egg situation?
Probably the next most important economic data will be the April construction report on Tuesday. Other economic news this week should provide some insights on manufacturing. The May ISM numbers are due Tuesday, followed by April factory orders on Thursday.
Separate speeches by two different Fed Presidents on Thursday deserve full attention. We do expect the Fed to continue to be more concerned over deflation than inflation.
Stocks to Watch
Over the last week, the following stocks had the largest bullish and bearish sentiment shifts amongst the sell-side.
Disclosure: NO POSITIONS