Is Sell In May And Go Away An Unwise Option This Year?

In case you did not noticed, the markets had rallied globally.

And it's now May. And come May, it's usually Sell In May And Go Away.

On CNBC: What Pullback? Stock Rally Still Has Legs, Strategists Believe

• But several strategists say in notes that they see stocks still moving higher. Citigroup's stock strategist Tobias Levkovich warns the market's naysayers could be proven wrong, and this could be an above-average bear market rally.
  
  The rally gained strength on Monday amid optimism about the US economy. The S&P 500 rose 3.4 percent to 907, above the key 903 level, which put it in positive territory for the year for the first time. The Dow finished up 2.6 percent at 8426. The S&P financial sector was 10 percent higher and was the best performing group.
  
  Goldman Sachs strategists said they see progress on a number of economic fronts and are now boosting their exposure to cyclical stocks. Laszlo Birinyi says, if you look at history, it looks like the market's still moving higher.
  
  Citigroup's Levkovich, chief U.S. equities strategist, said the investment community is "almost shocked" by the near 30 percent rise in the S&P 500 since early March.
  
  He said the case is building for a second half recovery, and many investors are ignoring the fundamentals. Since early March, financials have risen 74 percent; cyclical consumer discretionary have jumped 46 percent; industrials gained 44 percent and materials are up 41 percent. Meanwhile, the defensive sectors are underperforming.
  
  Levkovich said a few metrics have encouraged him, including the prospects for a likely earnings recovery for late 2009 and 2010, and an improvement in bank lending standards, likely by late 2009. Another positive is a likely moderation in inventory reduction, which would create a production pickup and that would help earnings.
  
  Also, a higher stock market could also boost consumer confidence. For that reason, the market has a good chance of seeing a better-than-average bear market rally.
  
  The average one-year bear market rally off of the bottom has risen more than 43 percent and it's likely, there is still room to go higher. Another factor is that there are lots of investors who missed the moves and are sitting with large cash hordes.
  
  Laszlo Biriniy says the market's 53-day gain and 10 percent move above the 50-day moving average are second only to the market's performance in 1933. He also says in a note that the net advances over the past 10 days are the third strongest ever, but he sees a case for even more gains.
  
  For instance, only 29 percent of the S&P 500 are above their 200-day moving average. But the most stunning indicator he mentioned was that the number of days to the first correction in previous bull runs is 194 days, and we are only at day 53. One factor that takes away from his thesis is that almost half of the S& P are now up 50 percent from their 52-week lows.
  
  Goldman stock strategists, meanwhile, boosted their exposure to cyclicals because of signs of improvement in several key areas. The strategists say corporate access to credit is improving, housing is showing signs of stabilization and there is a decline in the write downs and provision at financial firms.
  
  They also said that the patterns in previous bear market bottoms would support a heavier cyclical tilt. They acknowledge that they are late to buying cyclicals, but they said they knew that would be the case because the market tends to punish early rotations into cyclicals. Their year end target is 940 on the S&P.
  
  And finally, I talked to Brown Brothers Harriman's Brian Rauscher, a long-time bear who turned bullish in early March. He was concerned last month that the market could be showing signs of moving too far, too fast. But today, I asked him in an email if he's still thinks the market will go higher. He answered: "May have take a deep breath to get through 900 (a day or so), but this market is moving higher.."

On Bloomberg News: ‘Sell in May, Go Away’ Unwise This Year, UBS Says

• May 4 (Bloomberg) -- U.S. investors should stick with stocks and ignore the axiom of “sell in May and go away,” according to David Bianco, UBS AG’s chief equity strategist.
  
  “Hold on for further gains in May,” Bianco wrote in a report dated May 1. Seasonal patterns are “a weak force” by comparison with the economy, which is showing “clear signs of improvement,” the report said.
  
  The CHART OF THE DAY shows the average monthly returns for the Standard & Poor’s 500 Index since 1950. For May through October, the figure is less than 1 percent each month. Averages for November through April exceed 1 percent in every month but February.
  
  Data on initial claims for jobless benefits, manufacturing and consumer confidence justify the gains in stocks since March, Bianco wrote. “Reduced risk of bank nationalization” is in the market’s favor as well, he added. The S&P 500 rose 30 percent from its March 9 low through the end of last week.
  
  Bianco stood by a projection that the index will surpass 900 by the end of this month. The index hasn’t closed above this threshold since Jan. 8. He also repeated a year-end estimate of 1,100, leaving him tied with JPMorgan Chase & Co.’s Thomas J. Lee for the most optimistic view among 11 strategists in a Bloomberg News survey.
  
  The figures in the chart were compiled by Plexus Asset Management and cited in a report by John Mauldin, president of Millennium Wave Advisors LLC, whose outlook on stocks differed from Bianco’s.
  
  “There are times when you should be cautious and times when you should throw caution to the wind,” Mauldin wrote in the May 1 edition of the weekly newsletter, Thoughts from the Frontline. “I think this is the former.”

Well here is the link to John Mauldin's weekend editorial, Sell in May and Go Away ( Subscription is required. Hey, it's free. )

Here is a snippet of what John wrote. ( I strongly suggest you read the whole editorial! :D )

• The point is that it is more important to get the general direction right than to be right on the specifics. In August of 2006 I was seeing a modest recession in the future. As time went on, I became increasingly bearish. But whether it was to be a mild recession or a major one, the advice would have been the same. You do not want to get caught long the market before a recession.
  
  Today, there are those who say the stock market will start rising six months before the economy does. And maybe it will. I don't know. The predisposition of this market is down. Valuations are not at a level that has spawned major bull markets in the past. At the beginning of real bull markets, volume is strong and rising. Now it is weak (modest at best) and shows no real sign of becoming strong, especially going into summer.
  
  Further, this rally has all the earmarks of a major short squeeze. Regulators have recently (and correctly) been enforcing short selling rules that require stock to be delivered and settled on short trades. This may be a one-time event. When the short squeeze is over, the buying will stop and the market will drop. Remember, it takes buying and lot of it to move a market up but only a lack of buying to create a bear market.
  
  Corporate earnings are likely to go even lower, as consumer spending is likely to get weaker in the coming months. Capacity utilization is at its lowest point since they began tracking it. The National Federation of Business says a recent survey shows none of the responders plans to raise prices, which is not a sign of business strength.
  
  Banks are not yet lending, and the past quarter's positive performance was mostly accounting gimmicks. Citigroup, for instance, said they made $1.6 billion. They did this by booking a one-time gain of $2.7 billion, because the value of Citigroup bonds have fallen (!), giving them the theoretical possibility of buying back their debt at a discount. And with consumer and credit card loans showing more weakness, Citi decided to REDUCE its loan loss reserves, allowing it to show another $1.3 billion in profit. And then there was the profit of $400 million from the new mark-to-market rules, which allowed them to produce a profit on "impaired assets." Without all these games, there would have been a loss of $2.8 billion.
  
  Maybe this time it's different. But when I survey the economic landscape, I see lots of opportunity for disappointments and missed targets. And bear market rallies are killed by disappointments and missed expectations.
  
  To be long this market going into summer you need to be brave or have very serious stops on your portfolio. I think the possibility of missed expectations at the end of the second quarter is high. It could be ugly.

Jesse wrote some interesting notes too. SP Futures Hourly Chart Update at 2:30 PM

• The market will let us know which one it is reasonably soon. Try not to outguess it if you value your portfolio. This is still a "trader's market.
  
  "Our key short term indicators have not yet delivered a SELL signal.

Regarding the bank lending. Here's another excellent editorial on China and its loan growth issue. Distortions in the Chinese lending environment. Do give it a read for a more balanced view. :D