Sell in May and Go Away
Research for Online Investors

by John Dalt

7/01/10

Sell in May and go away sounds like good advice as we sit today.  The market has been punishing investors for the last two months, and it doesn’t look like it is over.  We crashed through the 1040 support line on the S&P 500 yesterday.  This morning touched 1010 before bouncing.

This was close to support of 1009.  We have identified 1009 as the 38.2% retracement of the market advance from March 2009 to April 2010.  This is strong support.  The next line in the sand is 943, which is the 50% Fibonacci retracement of the market advance from March 2009 to April 2010.

The market should get a bounce from here, if we can get some good news. We don’t hold out much hope the employment report tomorrow morning will ignite a fire under buyers.  Lacking any bad news, a rally could occur when institutions and funds start buying and supplying some support to stocks that are beat down.

Deep pockets buying in volume would give a boost in confidence to retail investors that prices were reasonable and raise the greed gauge. We need some dollars chasing stocks as opposed to the low volume we have been experiencing as stocks have consistently sold lower and lower. Our highest volume days have been when the market is moving down.

You can see the higher volume (bars on bottom of chart) on down days.  Also, please notice the blue 50-day moving average line at 1116 is approaching the red 200-day moving average line at 1111.  If and when these cross (tomorrow) that is known as a “Death Cross.”  You can fill in the meaning of this, but suffice it to say, it is not what bulls want to hear.

A Death Cross is widely recognized as a bearish signal.  Unless the market can rally and move these moving averages apart we look to see more selling in July.  Earnings season starts next week, and we don’t know if it can get here soon enough!

We wrote about the China 25 etf (FXI) going into a Death Cross condition on March 24 in Death Cross Indicator.  It has not recovered.  This was one etf, now the Mark of Death applies to the U.S. S&P 500.

The U.S. economy is recovering, but at a slower rate than investors expected and big government predicted. The disconcerting effects of slow growth, higher taxes and continued deficit spending by the government are the new economic reality. All we need now is for inflation to start rearing its ugly head. We are just a few steps away from the days of “Stagflation.” All the gaiety and excitement of the Jimmie Carter years.

As an investor it is wise to sell into the rallies and raise some cash.  Our long-term subscribers are 25% cash right now, and may be selling some more assets if they hit our trailing stop losses.  It is better to have dry powder to use when the fight is good than to continue in a losing battle, even if it is less powder!

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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