Sell in May

End of Day Update

MARKET BEHAVIOR
Stocks slipped nearly a percent and find themselves just above the 50dma.  Volume recovered from Monday’s lethargic levels and was back near average.

MARKET SENTIMENT
Monday’s bounce off the 50dma lacked broad participation as shown by the anemic volume.  Today we gave it all back when buyers failed to step up and defend these prices.  While most owners are confidently holding stocks and not selling this weakness, it is becoming harder and harder to find people willing to buy near record highs.

Many think the escalating situation in Ukraine will lead to further weakness, but the market has long priced in Ukraine and it is already ancient history.  Anyone who understands politics knows neither Putin nor Europe can afford to impose material economic sanctions or embargoes on each other.  Both sides need each other too much and while these events grab headlines, they will have little consequence to corporate earnings in this country.  The market rallied when Russia invaded and captured Crimea and eastern Ukraine is just as economically trivial.  Anyone who fears these headlines sold weeks ago and there is no one left to sell the escalation.

But just because one thing doesn’t cause something else doesn’t meant they are not correlated.  (causation, correlation, and coincident) While few owners are actively selling these headlines, it is one of many reasons prospective buyers are not in the mood to bid up prices.  Tight supply can hold the market up for a surprisingly long time, but there comes a point when even that cannot compensate for diminishing demand.  Right now it feels like we are approaching that point.

As we creep toward the summer season, many senior money managers at big institutions are getting ready for summer vacation and not in the mood to initiate new positions.  This is why more often than not summer trading is so unremarkable.  While the senior decision makers are on vacation, big money doesn’t buy or sell in material volumes.  This means we will likely drift sideways until they come back to work in the fall.  Of course “sideways” is relative and simply means staying within the recent range between 1,750 to 1,900.  While a 150-point dip still technically counts as sideways, that is anything but boring.

TRADING OPPORTUNITIES
Expected Outcome: Upward momentum stalls as buyers become harder to find
Last Friday’s stronger than expected employment report was more than enough excuse to jump-start this bull if it was poised to surge higher.  The fact that we stalled instead shows few are willing to buy this market no matter how encouraging the headlines, so it appears like prices need to come down a bit before new money will venture in.  This is far from the crash many are predicting and is little more than a normal and healthy dip back into the heart of 1,800/1,900 trading range until this fall.

Alternate Outcome:
Volatility and headline uncertainty is flushing out anyone with a weak stomach.  This churn refreshes the market and leaves us with a solid foundation of confident owners who are unfazed by negative headlines or modest weakness.  When they refuse to sell, that keeps supply tight and props up prices.  Even when demand is light, prices continue to rise if supply is even more scarce.

Trading Plan:
Near record highs is a better time to be taking profits than adding to positions.  Long-term holders should sit through the sideways trade, but they would be better served waiting for better prices before adding to their favorite positions.  Swing traders should already be taking long profits and watching for a short entry.  Shorting a bull market is one of the hardest ways to make money, so be nimble and take profits early and often.

Plan your trade; trade your plan