A new trading month begins but this one dawns a familiar moniker: “Sell in May and go away.” If you followed the advice of that phrase the last 2 years then you did indeed miss out on some very volatile choppy trading. However, if you went away and didn’t come back at the right time you also missed out on what were the bottoms for the year. In 2010 and 2011 the markets have peaked in late April/early May, pulled back going into the Summer, and then formed/completed bottoms in the late Summer.
This May is much different than the last two though, why? Because judging by sentiment, it seems as though many are preparing for the “sell in May” theory to take hold of the market. We went back and looked at the AAII sentiment survey results for the last week of April going into May the last 2 years, take a look at what we found:
2010: Heading into May 2010 the survey was 41% bullish and 28% bearish
2011: Heading into May 2011 the survey was 38% bullish and 31% bearish
Compared to 2012: Heading into May 2012 the survey is 28% bullish and 37% bearish
The historical averages of this survey are for 39% to be bullish and 30% to be bearish, so this years results heading into May are at an obvious bearish extreme. Furthermore, the last 2 May’s the S&P500 had spent a grand total of 1 week near its highs for that year, both of which occurred just before or at the beginning of May. This year, SPX has spent 5 weeks near its highs for the year as we head into May.
So not only is sentiment much different heading into May 2012 then it was in 2010 and 2011, the technical backdrop is different as well. So sell in May at your own risk, and if you choose to do so, make sure you know when to come back. Even when the market has faltered starting in May, it has led to tremendous buying opportunities. Again though, at the worst we’re expecting consolidation at the top end of this current range between 1,380-1,420. In our view, you shouldn’t sell in May and go away, you should sell if SPX breaks below 1,357. Doing so would be a sell signal based on the charts, not the calender.
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