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Monday, May 6, 2013

Sell in May?

I have seen a lot of discussion on the old saying "Sell in May and go away".  I have seen some pretty stupid arguments for why it will not apply this year.  It has been the case the last three years.  Will be different this time?  I want to look at a very long term monthly chart of SPX and see if we can glean some useful information from it.

There are a number of things I have marked on the chart.  Lets start with that, then I will get to the indicator in the bottom panel.  The last bull market kicked off in 2003 with one heck of a run up.  It also ended in 2007 with another big run.  Do you see any similarity to the current bull market?  With the margin debt situation it is very clear to me this is a blow off top.  I don't know where and when it will end, but it will end and a new bear market will be born.  Notice the testing of the highs in 2007.  Will we get a similar formation at the end?  That is a burning question I cannot answer.  With an apparent global recession going on and earnings already showing the affects of that it is hard to say.  With the way we ripped out of the low in 2009 I have been worried this entire bull market that it could end the same way in reverse and not give us much if any warning.  Maybe I worry for nothing, but I just have that feeling.

The indicator in the bottom panel is the percentage price is above the 18 SMA.  As you can see we are in rare territory since the secular bear market began in 2000.  I circled the last four times we were up near here. In each of those instances the market pulled back to the 18 SMA.  If May ends up positive it will be 11 of the last 12 months were up and 7 in a row.  I think it would be very difficult for June not to be down.  I think selling some time in May will be a good play.  That does not necessarily mean it is at the beginning of the month though.

This sure has a lot of the characteristics of the final leg up of a bull market.  Between the extended price action, high margin debt, and worsening fundamentals it looks pretty classic to me.  Even if the bull market does not end this year a trip to the 18 SMA is almost guaranteed to happen.  I expect that to occur before the year is over with.


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