Raymond James strategist Jeff Saut is the latest to jump on the now is the time to book profits, bandwagon.
An old stock market “saw” states, “Sell in May and go away,” emphasising that the worst part of the year for stock performance is the months between May and November. To be sure, a $10,000 investment in the DJIA purchased in November and sold in April grows to ~$480,000, while the same strategy employed between May – October shows a loss of ~$328 (study: between 1950 –
2003) . . . thus, “sell in May and go away.” Obviously we have modified that old axiom this morning given our statement – “Don’t wait for May to go away!” Nevertheless, despite having been too soon’ly cautious since S&P 1150 – 1160, which is tantamount to being wrong, we are “stepping up” our cautionary counsel this week.
Our increased caution is driven by a number of metrics. To wit, preliminary data suggests last Friday was the first 90% Downside Day since February, our sentiment gauges are back to as bullish as they were in 1987 (read that bearishly), the CBOE equity put/call ratio is at 0.32, for its heaviest “call volume” relative to “put volume” since August of 2000, stocks are the most overbought since the rally
began in March 2009, some of the leading stocks are not responding to good news, Thursday was session 34 in the “buying stampede” that began on February 26th (rarely do such skeins last more than 30 sessions), we’ve gotten that peak-a-boo “look” into the long envisioned target zone of 1200 – 1250, volatility is back to the complacent 2008 levels, and the list goes on.
Yet not only the empirical data is suggesting caution, there are inferential gleanings as well. Recently, Robert Prector, of Elliott Wave fame, appeared on one of my favourite stock market shows with a number of my friends. Market participants will recall that Mr. Prector has been forecasting doom for the equity markets for a decade. It is also worth mentioning that he correctly “called” the
recent rally, which he now deems is over. Still, given Mr. Prector’s strategic negativism, he was barely allowed to express his views by my panelist friends. Now while I too don’t agree with Mr. Prector’s long-term bearishness, I have seen this act before. Ladies and gents, in the past when the cacophony of “bullish boos” became so deafening as to drown-out all of the negative nabobs it has
spelled too much bullishness in the short-term.
As for the news backdrop reinforcing our caution, while Greece is likely off the “bankruptcy table” in the near-term, it is not off the table in the intermediate-to-longer term. Emphatically, we think Greece will eventually default; and, it will not be the only country to do so. Indeed, we tend to view Greece as the Bear Stearns of Europe with nobody really knowing how many countries will fail
next. Then there is Iceland’s volcano, which currently has no end in sight, and will most certainly impact the world’s economic statistics. In fact, I heard one commentator suggest that if the eruption lasted long enough it could foster another “ice age.” Then there was last week’s Goldman gotcha’ that suspiciously materialised in front of the movement toward financial reform. Studying the storied history of Goldman shows that Goldman revelations tend to mark inflection points in the equity markets.
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