Is “Sell In May” Already Circled On Wall Street’s Calendar?

 

“All generalizations are false, including this one.” — Mark Twain

 

For those investors who may have been feeling a tad complacent due to the recent record highs of several of the major indices, last week probably served as a reminder that high volatility is always just a shout away from knocking the market down a notch or three.

Last week’s mayhem out of Boston served as just one of the factors that brought Wall Street’s recent bullish momentum up short, others being Apple’s continuing down-spiral, mixed Q1 earnings reports from a number of major corporations, the continuing dive of gold, and the reemerging concern about the health of the economy of both China and the Eurozone.

The Dow Jones Industrial Average (DJIA) experienced its sharpest weekly drop in over ten months, as it fell 2.1% over the course of the week. The benchmark S&P 500 Index (SPX) suffered a similar fate, also losing 2.1% over the same period. The tech-laden Nasdaq Composite Index (COMP) suffered a more extreme setback, falling by a hefty 2.7% for the week.

Volatility was evident in full force last week as well, as measured by the CBOE’s Volatility Index (VIX). The index, commonly referenced as “the fear gauge,” has been hovering around six-year lows for much of the year, as investor sentiment has been predominantly immersed in a risk-on mentality.

But fear in the market can come on fast and strong, as indicated by last Monday’s 42% jump in the VIX.

The relationship of the VIX to the equity market is one that is inverse in nature, so as the market goes down, the VIX generally goes up, and vice versa. But what is one man’s fear becomes another man’s greed, so the sharp drop in the market earlier in the week evidently came to be viewed by many others as yet another chance to “buy the dip.” The bottom line, at least in terms of the VIX, was that the index gave back almost 15% of its jump by week’s end.

So is this a good time to pack your portfolio up for an early summer vacation and follow that familiar Wall Street adage to “sell in May and go away”?

There may be some events lining up this coming week that could combine to push investors off in that direction, depending on how they play out.

Apple (AAPL) will announce earnings on Tuesday after the market closes, and a number of analysts have already lowered their Q1 estimates for the “house that Jobs built.” It would probably take a severe miss off these numbers to send Apple too far south, as its current P/E and cash stash will become too much for value investors to pass up, even if the growth investors have largely left the room. But if the estimates do indeed prove to miss the mark by too much, an irrational stampede could ensue.

Besides Apple, there will be 120 S&P 500 companies that are scheduled to report earnings this week. More than enough to move the market either back to the uptrend that has been in place for most of 2013, or enough to reverse that trend and begin to establish a new one in the opposite direction.

Several other events of note will unfold this week, some of which would certainly be considered potential major market movers on their own, but would shift from potential to realized should they move in tandem. These include flash PMIs for both China and the Eurozone, a report that indicates the trend of the manufacturing sector in those respective regions.

Investors will be looking towards the housing market on Monday and Tuesday, as data on both new and existing home sales will be reported. A bright spot in the economy this year, a continuation of good news from this sector will go far in continuing the bullish side of the conversation. The flip side of course is that if this sector of the economy offers up any surprises, the market could turn fast.

Finally, at the end of the week, the domestic GDP numbers for Q1 will be released, and while economists are predicting marked growth over last quarter, the size of that growth will be more highly analyzed should some of the other areas of concern come to the fore.

Nothing wrong with having a plan to put in place should the “sell in May” argument gain traction this week. Keep an eye open for all the macro events unfolding throughout the week, and maybe dust off that vacation valise just in case.

What the Periscope Sees

The Sabrient SectorCast ETF Rankings rate each of the ten U.S. industrial sector iShares (ETFs) by Sabrient’s proprietary Outlook Score and are revised on a weekly basis. This week, the Financial Sector lands at the head of the class, knocking off the Technology Sector’s recent extended stay atop the leaderboard.

Here is the current list of some of the YTD top performing Financial Sector ETFs year-to-date, as of the second week of April:

KIE — SPDR KBW Insurance ETF, +16.55%

FXO — First Trust Financial AlphaDEX Fund,  +13.08%

IYF — iShares Dow Jones US Financial Sector Index Fund, +10.97%

VFH — Vanguard Financials Index Fund, +10.76%

PSP — PowerShares Global Listed Private Equity Portfolio, +10.47%

ETF Periscope

Full disclosure:  The author does not personally hold any of the ETFs mentioned in this week’s “What the Periscope Sees.”

Disclaimer: This newsletter is published solely for informational purposes and is not to be construed as advice or a recommendation to specific individuals. Individuals should take into account their personal financial circumstances in acting on any rankings or stock selections provided by either Daniel Sckolnik or Sabrient. Neither Daniel Sckolnik nor Sabrient makes any representations that the techniques used in its rankings or selections will result in or guarantee profits in trading. Trading involves risk, including possible loss of principal and other losses, and past performance is no indication of future results.