“Sell in May” or “Dull Tape”?

Faithful readers (thank you) know that I have an affection for time-tested market adages.  Two of have the potential to collide this week: “sell in May and go away,” and “don’t short a dull tape.”

Kudos if you’ve resisted the idea of “sell in May” so far this month.  As I type this, the S&P 500 (SPX) is up over 6% and the Nasdaq 100 (NDX) over 9%.  In a normal environment, those would be decent years, though of course this is environment is anything but normal.  For starters, we’ve become accustomed to double-digit annual percentage gains in recent years.  And when we consider the recent plunge and almost immediate turnaround, we find ourselves enmeshed in one of the most powerful momentum surges that I can remember.

Quite frankly, I’m not a big fan of relying on seasonality.  While there are some factors that might influence seasonal patterns – I favor Eddie Murphy’s “GI Joe with the kung fu grip” explanation – those factors get overwhelmed by the events of the moment.  While May is one of only three months that have yielded negative returns over the past 15 years (along with August and September), and 5 years (February and September), the average decline in each of those periods is less than 1% and the dispersion of those monthly results is substantial.  That also means that average returns for June and July over those periods has been positive. Thus, my persistent question of “go where?” remains unanswered.

As for “don’t short a dull tape”, while the market activity itself has been rather dramatic, there is a distinct lack of catalysts this week ahead of the Memorial Day weekend.  Economic reports are sparse until after the holiday, and while we have received results from key retailers like Home Depot (HD), Lowes (LOW), and Target (TGT), the modest post-earnings declines in these names have not spooked the overall market.

Things certainly pick up next week, with a significant flurry of economic data that include Durable Goods, GDP, PCE, FOMC meeting minutes, and sentiment reports from both the Conference Board and University of Michigan.  And those are likely to be dwarfed in market importance by the most important single earnings report of all – Nvidia (NVDA), which reports after the close on Wednesday.  Any concerns about a dull market evaporate on this Friday’s close.

Thus, while we have seen some early declines in recent days, positive momentum has seized control once the initial selling ran its course.  As I type this, we’ve had SPX bounce back nearly all the way back after a nearly -1% overnight selloff, and NDX has moved solidly into positive territory.  The facetious pattern that I laid out earlier this week seems to be in place again today:

1. Let pesky foreigners sell overnight
2. Wake up (optional: make coffee, brush teeth, shower)
3. Watch for 8:30 economic news
4. Chase rallying markets after stock market opens
5. Rinse, repeat

That rubric was written while we were sweating the potential effects of the Moody’s downgrade of US debt.  We noted that 2-, 10-, and 30-year yields

…were breaching some key psychological levels — 2-yr > 4%, 10-yr > 4.5%, 30-yr > 5% — but they had all retreated below those points by about 10am. 

Today we saw those same breaches, but as of now, none of those yield have retreated.   They all remain above those key levels, and perhaps more importantly, the US dollar is down about -0.6% against a basket of major currencies.  Remember, all things being equal, a currency should rise against its peers when rates rise. 

In this case, all things are not equal.  I interpret this as another piece of the tidal shift out of US assets.  That would explain both the early selling in stock futures (see item #1 in the list above), along with the ongoing sales of both bonds and the dollar.  Last month, we noted the significant “sell America” trade.  Although those flows have ebbed from a tidal wave into a bit more of a steady leak, they still exist – at least in the bond market.

The likely best time to reassess the title question will be Friday afternoon.  Barring any outside catalysts – perhaps from the budget negotiations – the momentum trade seems intact until the weekend.