“Sell In May and Go away”

Here we are at that the time of year again, where the markets tend to either lose their value during the six months of May through September or gain at a slower pace, compared to the months of October through April. Even though there are many reasons why this old saying is still around, one of the main influences is investor sentiment. Investors normally tend to shift their money into safer assets during the summer months, hoping to yield a yearly return which is higher than the indices. Around veterans it is common to think that the months of October through April are characterized by large bonuses, a Santa Claus rally and First quarter earnings, all which tend to drive the markets higher. The summer patch is a time where investors are more laid back and then one must not forget the time of year where people go on vacation, driving volume lower. 

 Even though no one is denying that the old saying could be true, this time round things could play out slightly different.

When taking a look at the S&P500 one can see a completely different picture this time round. Even though stocks did receive a boost towards the end of the year, they continued their sell-off during what is supposed to be the strongest months of the year. March was a major turning point for the S&P500 blasting higher, closing week after week with gains. Overall the S&P500 closed the so called bullish months of the year with a loss of approximately 20% - ouch


 

Has the Bullish Rally just started?

While I personally don’t think anyone can really answer that question, one thing we do know is that the recent rally has been characterized by “smart money” and not by the retail money coming back into the markets. In other words Main Street hasn’t yet joined Wall Street.

Last week, Wall Street was battered around, as stress tests showed that large banks are undercapitalized, while the auto industry looked like it was going to crumble. In addition economic growth showed a gloomy picture as GDP dropped in the first quarter by -6.1%.

Despite that fact the markets failed to decline!

The last couple of months have been characterized by quantitative easing as the Obama administration has flooded the system with additional cash. By taking a glance at the chart below one can see that M1 and M2 have both soared over the last couple of months, as banks have received additional funds. When observing the chart more thoroughly one can see that the estimated M3 supply is still at low levels, meaning that money has yet to circulate within the economy. Even though LIBOR rates have dropped by an enormous rate, the current equity rally is still lacking mass volume, due to low confidence and tight lending conditions.

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