Buy In May?

“Sell in May”, “The trend is your friend”, “More buyers than sellers”, “Sticks & stones”…..

I hate tired old clichés, especially the market-related ones I associate with a high-voiced, Scottish equity analyst, who used to chant them out at very regular intervals.

The trouble is, the most popular, and therefore most irritating, ones got where they are today because they have plenty of street cred. So I’m going to have look at whether we can all get into our shorts for the summer, or whether a decent pair of rose-tinted sunglasses would be a better accessory.

Today I’m going to kick a few tyres in the real world and tomorrow will be chart heavy as I see what the technicals can offer us.

Spring Really Has Sprung

Just like Ulysses, the stock markets have overcome everything the gods could throw at them; dire economic news, deteriorating company results, the fear of a swine flu pandemic and the threat of the US car giants becoming bankrupt. Even today the prospect of Bank of America (BAC) needing to raise $34 billion was swept aside as a mere inconvenience.

While all of the above have been flying around, check out the rise in stock markets from their March lows:

• Dow (^DJI) +30%
• S&P 500 (^GSPC) +35%
• FTSE (^FTSE) +26%
• Dax (^GDAXI) +35%

So, green shoots or seasonal weeds? Let’s breeze through a few things that have given bulls the horn and question whether or not they’re sustainable.

Economics

To keep it simple the data can be broadly split into two categories; historic data such as GDP and unemployment, and predictive (or leading data) like the confidence and sentiment gauges.

By and large the historic data has been far worse than expected; witness the recent GDP releases showing falls of 6.1% in the US and 4.1% in the UK, and the rising jobless numbers spanning the globe. Recently these have been dismissed as yesterday’s news, but they will come back in to fashion, especially if they fail to improve over the next few months.

In stark contrast, many of the leading indicators have been better than expected and well received. These sentiment surveys spanned most of the main economies (certainly the US, UK, Europe and China) and different sectors including consumer confidence, manufacturing and services, and even housing.

Some surveys are still dire, but an improvement on previous readings; some look to show a genuine steady improvement, and some, like last month’s rise in the Nationwide House Price Index, could politely be described as random.

Many of these indicators still point to contracting economies, but at a slower rate than before. All in all, there’s been enough of a widespread turnaround in sentiment to suggest the worst could be over.

Corporate News

I’ll hold my hands up here; I don’t have anywhere near enough time to follow all the company reports. But I do keep my antennae tuned for big upsets and I must say there seemed to be a disappointing lack of them this time around.

The big US banks managed to bluff their way through, perhaps with the stress-test acting as a deterrent to short-sellers. Otherwise, it looked like expectations had been marked down sufficiently for merely bad results to be greeted with open arms.

What’s Coming Up This Week?

OK, we can dance around the ifs and buts and perhaps even guess the odds on the next big move, but take care in rushing into a position this week. Here’s just a short-list of announcements due this week:

Economics

The big daddy is the US monthly payrolls number on Friday, but before that we’ll hardly be twiddling our thumbs in boredom. Today sees the ADP (best guess) employment change number out of the US. The main event on Thursday will without doubt be the ECB’s announcement, not so much on a change in rates, but on whether it will shift fully (or partly) towards a policy of quantitative easing.

By contrast, the UK meeting is expected to be a fairly dour affair, but as the meeting takes place against the backdrop of the quarterly inflation report I’ll be looking for any changes in the scale of their gilt purchases.

Company Earnings

There are bags of Premiership companies reporting this week, but the emphasis has switched from the US to Europe. These include Unilever, Deutsche Telecom, AXA, Soc Gen, Swiss Re and Diageo, but check out the Weekly Wrap for a full run down.

Stress Tests On U.S. Banks

At the time of writing we now expect the results to be made public on Thursday. Plenty has already been written about the need for a ‘Goldilocks’ type of announcement; too soft and it will lack credibility, too hard and it will scare the hell out of the market.

My View

Er, hmm, my view has cost me a pretty penny over the past month. The cynical, hard to get excited, approach left me playing the short view even after it had left the front pages.

I’m happy to concede a relief rally from the darkest days, but I struggle with the prospect of a sustainable recovery. I still think there’s too much debt, both in the public and private sectors, to build on.

One could argue that now all the chatter has changed from ‘Bear market rally’ to ‘Green shoots of recovery’ the market is better placed for a fall. Sure, there’s a lot of cash on the sidelines, but these guys aren’t all mugs. It looks like this recent rally has been a panic rush from those who feared getting left behind. But not all will fancy committing their money almost 1000 points off the bottom.

However, I’ve no idea when the economy or markets will turn. It could be as soon as this week, but some of the clever bears are talking about a big fall later this year. In trading terms that’s a long time to tie capital up for.

Tomorrow, I’ll switch from the real world to the dark side and see what can be gleaned from the charts.

Subscribe by RSS Subscribe by Email