It's May, Time to Go Away?
Last Update: 01-May-09 08:51 ET
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There was a time in early March when we called attention to the extreme sense of negativity in the stock market and cited it as one reason to think we were in store for a meaningful rally. That view proved prescient, but as much as we were struck by the level of negativity then, we are now struck by the level of optimism now.
We concur with the view that the economic data, and earnings news, have signaled that the economy is in a bottoming process. However, the market is showing a propensity these days to view everything with rose-colored glasses and that perspective often coincides with near-term tops in the market.
The difference of opinion today, versus early March, is that we don't expect there to be a selloff that would match the magnitude of the recent rally. Conditions are better on a number of fronts. Credit spreads have narrowed considerably, commodity prices have risen, companies have regularly beaten too depressed earnings estimates and, as noted above, there is a growing body of economic evidence that suggests the worst of the downturn is behind the market.
On this latter point, CNBC is quoting Warren Buffett today as saying there is no longer an economic Pearl Harbor, but that the war isn't over. That is an interesting comment, especially since it took nearly four years after Pearl Harbor for World War II to end.
In any event, we have our concerns about the pace of consumer spending in the months ahead as the unemployment rate continues to rise and consumers show a newfound appreciation for saving money as opposed to spending beyond their means. The housing market, while showing signs of stabilization, is a long way from recovery, too, and the recent rise in Treasury rates isn't helping there.
Judging by the numerous reports from major banks about deteriorating credit quality, there is a basis still to be skeptical, particularly since unemployment is headed higher.
So, we worry that the market is starting to get carried away with the recovery trade since it seems to be looking at things as if this is a normal economic cycle -- and it isn't.
Last week we recommended investors take some profits from the run off the March lows and averred that the market was going to be entering a consolidation phase that we thought would be mostly lateral for two reasons: (1) investor advisor sentiment data still wasn't showing extreme bullish readings and (2) we felt there was an institutional bid sitting under the market from managers who missed this rally but who are anxious to buy on weakness so that they are in position to capitalize on possible further gains.
Things have pretty much played out as expected in this respect. In the ensuing period, the S&P 500 has gained less than 4 points entering today's trade.
Once again this week we have seen the market draw support from the "bottoming-out" trade. However, the point to be made is that the market hasn't really gotten anywhere on that trade. It has been a supportive factor, but it hasn't been a distinctly uplifting factor like weeks past.
As noted above, we aren't looking for a material selloff now. We think it is prudent, though, for investors to trim positions in holdings that have enjoyed outsized gains during the rally.
As we look ahead, our concern lies in an expectation that a wait-and-see attitude permeates the market and it goes sideways for an extended period as investors aim to confirm through the economic data, and earnings commentary, that recent signs of recovery aren't temporary.
If things take shape in an economic manner that suggest 2010 estimates need to come down significantly, it could be a painful discounting period again for the market. We hate to use the cliche, but time will tell.
Seasonally, the market is entering what has historically been a less-than-thrilling period for investors; hence, the expression "sell in May and go away." This time around, though, we could see a variation on that perspective.
Given the wait-and-see attitude we think is going to take shape, the spin quite simply could be, "It's May, go away."
As of this posting, the S&P is indicated to start the session about 2 points higher.
