May 15th, 2006

Major Stock Market Correction in the Offing?

I was almost finished on another post dealing with the “Buy on breakouts or bounces off supports?” but I shelved that draft because of the drubbing the markets took last week. I can’t believe it was only a week ago, on May 7, that I wrote:

A couple of weeks ago, I wrote about beginning to become more bearish about the
market (Bottom of the List: Big Stock Declines) yet, since then, the market has continued its move up. As a firm believer in the power of momentum investing, I continue to ride the wave but do so with ever more caution. Gnawing at me is the counter-argument of a the “secular bear market” thesis and the other economic,
political and international forces that give us angst.

And last week, it seems like many began sharing those seem feelings. We haven’t had the sort of declines that we experienced last week since January as all the major indexes took big percentage hits. If the trendlines that I’ve had on the charts of the major indexes are good estimations of where their various inflection points actually are (see the charts in my over view of the indexes in “Stock Market Indexes: a Current Analysis” on February 12), then there’s still an chance of a bounce since none have actually violated those supports. But if not, a major correction for the 3-year bull phases is now in the offing.

Nasdaq Composite Index (.IXIC):

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Standard & Poor’s 500 (.SPX):

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Dow-Jones 30 (.DJI):

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Sell in May and Go Away:

If you do a Google search on the term “sell in May” you see articles many articles, some going back to 2001, and many conflicting opinions. One of the most current is one that Sam Stovall wrote for Business Week on May 4, 2005 entitled “Sell in May, But Don’t Walk Away“.
He enumerates some of the reasons why this saying actually came into being … but concludes:

“an investor who was long on the market from November to April but then
adopted a defensive approach by rotating into either the S&P
consumer-staples or health-care sectors during May through October, would have
found — as can be seen in the chart below — that the returns were worth the
effort.”

I did my own research and came up with these statistics:

1980-2005
Month Up Maximum Ave Up’s Down Minimum Ave Down’s
1 66.7% 13.18% 4.10% 33.3% -6.88% -3.12%
2 63.0% 7.15% 2.58% 37.0% -9.23% -3.45%
3 63.0% 9.67% 3.09% 37.0% -10.18% -3.58%
4 63.0% 8.10% 3.39% 37.0% -6.14% -2.48%
5 69.2% 9.20% 3.28% 30.8% -5.94% -2.34%
6 61.5% 5.44% 2.57% 38.5% -7.25% -2.37%
7 38.5% 8.84% 4.79% 61.5% -7.90% -2.40%
8 57.7% 11.60% 3.72% 42.3% -14.58% -4.69%
9 42.3% 6.24% 2.89% 57.7% -11.00% -4.01%
10 65.4% 11.04% 4.09% 34.6% -21.76% -3.63%
11 73.1% 10.24% 4.40% 26.9% -8.53% -4.22%
12 73.1% 11.16% 3.17% 26.9% -6.03% -2.63%

For the 25 years 1980-2005, July-September have been the only months when the S&P500 has experienced declines more often than increases.

Contrary to my basic nature, which is basically optomistic, for the first time in my investing life, I moved a significant percentage of my portfolio into cash. Most of the sales were in the latter part of the week so I still shared in the market’s losses. But, taking a high altitude view of the
economic and stock market terrain and remembering one quarter’s opinion that we are basically in a long-term secular bear market, I feel comfortable that the worst that can now happen to me is that I have undone positions that I may experience “opportunity costs” as the market successfully weathers this correction as some currently unforeseen positive political or economic events magically appear. But I won’t suffer actually losses if the sell-off that began last week gathers some accelerates and heads into a 10-15% correction.

While I not a fan of shorting since I’ve never made money betting against the market, I’m revisiting sectors previously identified as shorting candidates (like the recent May 1 post entitled “Homebuilders and Google: A Bear’s Perspective” also in March 7 in “Selling Homebuilding Stocks Short?“) to see whether I can make some profitable quick trades as the market corrects.

What may be more eerie is the prediction I made about the oil stocks in a January 28 post entitled “Oil & Gas Stocks in IBD100” in which I said:

“If the past is prologue, prices of Oil & Gas stocks could make another excellent move through March and April with a leveling off beginning in May. The forces causing Oil & Gas stocks to plateau could coincide with what has become a fairly reliable leveling off and decline in the general market at the end of Spring and onset of summer.”

Pretty good, wouldn’t you say?

CNBC Fantasy Portfolio Leaders:

It’s difficult focusing on the challenge because of the condition of the markets and the large gap between the leaders and the rest of us (my portfolio is still around $1.35 million with an upper 2% ranking). Interestingly, looks like the leaders continue to become more conservative as their portfolios and relative rankings remain little changed. Perhaps, as we get down to the finish line, one or two of the also-rans will again bet a large portion of their capital on a flyer to try to lunge out ahead. Here are the most recent stats:

td class=”xl26″ align=”right” width=”63″ num=”2589750.72″>2,589,751

5/10/2006 5/11/2006 5/12/2006
dwn4lovin 2,870,796 2,833,617 2,840,617
dewst22 2,602,835 2,587,751
Dexter101 2,282,784 2,535,284 2,542,284
jvsiragusa 2,286,878 2,505,699 2,507,699
jorge27 2,247,862 2,498,022 2,505,022
marc1998 2,488,804 2,490,804 2,497,804
btumhhay 2,479,411 2,481,411 2,488,411
dkarim 2,446,212 2,448,212 2,455,212
Zakman 2,451,375 2,420,915 2,427,915
bighugeguy 2,386,542 2,392,742 2,399,742
dowmaster 2,268,562 2,332,845 2,339,845
ccbell221 2,376,796 2,299,958 2,306,958
downtick1121 2,302,724 2,302,724 2,304,724
CJNYC 2,045,261 2,242,771 2,244,771
plobrutto 2,026,465 2,222,176 2,229,176
trader2qk 2,010,469 2,204,651 2,211,651
Baker 1,982,426 2,203,258 2,210,258
im2a1c0 2,014,047 2,193,785 2,200,785
thomasko 2,224,297 2,169,047 2,176,047
walterlong 2,052,273 2,158,163 2,165,163
amehrotra 2,209,242 2,156,619 2,158,619
aviavi 1,978,061 2,134,737 2,141,737
hiddencaps 2,101,419 2,089,899 2,096,899
Tlicious 2,184,794 2,081,280 2,088,280
davvoelk 2,140,632 2,079,831 2,086,831
Hypertrader 2,174,630 2,079,496 2,086,496
FORM
4
2,143,318 2,082,438 2,082,438
Ted123 2,072,686 2,074,686
dt18997 2,089,664 2,052,681 2,059,681
timtrish 2,043,897 2,043,897
jaesong 2,092,946 2,036,995 2,036,995
DavidA 1,966,092 2,028,691 2,035,691
mfesmire1 2,005,189 2,007,189
stang331 1,993,370 2,000,370

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