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Tomi Kilgore Archives | Email alerts
May 1, 2012, 12:02 a.m. EDT
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By Tomi Kilgore of Dow Jones
NEW YORK (MarketWatch) "” Some sentiment readings suggest investors may have jumped the gun in anticipating another weak May for stocks, meaning perhaps the opposite is more likely.
Concerns about European sovereign debt and a slowdown in the U.S. economy have sparked sharp market declines starting in May of the last two years. Since worries about Spain's debt and economy have increased recently, investors appear to be assuming the worst once again. Some analysts feel this could work in the bulls' favor this year.
President Obama released a new campaign video aimed at reminding voters of how bad thing were with the economy when he took office, and how much things have improved under his watch. The video will be played at the start of campaign rallies. Video courtesy of BarackObama.com.
The S&P 500 /quotes/zigman/3870025 SPX -0.39% fell 8.2% in May 2010, and another 5.4% in June. In 2011, the S&P 500 fell just 1.4% in May, but another 16% over the following three months.
Ahead of those May declines, the S&P 500 rose 1.5% in April 2010 and gained 2.8% in April 2011. With the index down 0.5% at 1397 in midday trading Monday, the index is so far on track to end with a 0.8% decline in April.
"When a trend worked well two years in a row, many investors...will jump on the trend and not only look for a three-peat but wipe alternative thoughts completely away," said James Meyer, chief investment officer at Tower Bridge Advisors.
The American Association of Individual Investors said the percentage of retail investors who are bullish for the next six months dropped to 27.6%, well below the long-term average of 39%. That's the lowest percentage since the week ending Sept. 22, 2011, which was just 1 1/2 weeks before the current bull market began.
And the latest reading showed that short interest on the NYSE as of the April 13 settlement rose to 12.93 billion shares, up 2.5% from March 30, and the highest level seen so far in 2012. Investors will "short," or borrow shares and then sell them, as a bet that prices will fall so the shares can be repurchased later at a lower price.
"Sell in May and go away" is an old trope on Wall Street, but that doesn't mean it hasn't been worthwhile advice. Justin Lahart reports on Markets Hub. Photo: Bloomberg.
What makes this year different is that despite recent signs of some slowing, Tower Bridge's Meyer said the American economy is stronger than it has been for years and still improving. "Since most of us are more interested in America than Spain, that's good news," Meyer said.
Other chart watchers have different reason not to expect a repeat of recent history.
Tom McClellan, publisher of the McClellan Market Report, said his Democratic Presidential Cycle Pattern, which he builds by averaging together the performance of the S&P 500 during four-year periods when the president was a Democrat, suggests that, while stocks aren't poised to rally in May, the downside is limited.
"It appears that we have seen all of the real price damage that we are likely to see for this correction, even though there is still more time needed to finish the corrective period," McClellan said.
Basically, the old Wall Street saying of "sell in May and go away" doesn't seem to work during Democratic election years. "Instead, one should be buying in May, ahead of the anticipated big June rally," McClellan said.
Support levels to watch for the S&P 500 start at the April 23 low of 1359, followed by the March 6 low of 1340.
Meanwhile, resistance remains close at 1422, which was the multi-year high seen in intraday trading April 2.
"While technical speed bumps remain in place, we are encouraged by the sentiment backdrop, as there is sideline money and short-covering potential to push major [market indexes] through resistance," said Schaeffer's Investment Research Director of Research Todd Salamone.
If the 1422 level is surpassed, the technical picture would be clear for a rally back above the 1500 level.
Tomi Kilgore writes about the markets for Dow Jones Newswires.
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