Is it time to follow another one of those snappy Wall Street phrases like "sell in May and go away?"
Over the course of many years, investors have made most of the cumulative gains in the market from November through May, with very little progress being made from June through September. My friend Justin Lahart over at CNN Money put some numbers to it: The cumulative gains over the last 50 years from the end of October to the end of May were 2,806% (7% annually for half the year), while the cumulative returns from the End of May through the end of October were 24% (0.4% annually for this half of the year).
So here we are in the beginning of June with poor seasonal timing, an extreme overbought condition, an extended market, the pre-announcement season, a sluggish economy, above average valuations and renewed market optimism. While all this sounds like a recipe for disaster, I would suggest taking a step back and looking at what the market is saying. The basic tone of the market -- despite the above points -- is strength.
As the various charts below show, some corrective action would be constructive because there has likely been too much strength. Frankly, traders and investors alike are hesitant to chase a more than 20% two-month gain in the indices because they know that at some point a shake out could make the purchase look wrong. As a result, they wait for the market to work off an extreme overbought condition and pull back toward support -- either the point of breakout or trendline -- before making new purchases. In other words, as the market seems less extreme, buyers begin to line up as long as no major support or trendline breaks have taken place in the corrective action.
We are at a juncture where any number of excuses could be given for profit-taking and something even more dire. The reality is that one doesn't need to make that call, but could instead be patient during the consolidation process (which could take a few more days or even weeks) and as equities work off the overbought condition and get closer to support, then look to be a buyer. Intellectually I can find a ton of reasons to be negative, but I also know intellectually the market is a lot smarter than I am.
Daily Index Charts Showing Overbought Condition and Support Areas
Source on all charts: Baseline
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