Technical Analysis: Sell in May and Go Away?
By Ann Sosnowski
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In this article:
Many investors abide by the “Sell in May and Go Away” adage.
The Dow Jones Industrial Average is severely overbought and due for a correction.
But the Transports are close to new highs, which may point toward more upside.
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We’ve all seen the headlines before after sharp rallies on the major market averages… “Stocks drop as investors grab profits…”
But you have to wonder if this kind of reporting, following new record highs on American indices, is going to continue, considering the month we’re in: May.
Every investor has heard the old adage, “Sell in May and go away.” But how much of that is going to resonate with shareholders this year, considering the Dow Jones Industrial Average just posted 24 days of gains in the last 27 sessions.
(This is the longest “winning” streak on the index since July 1,1927.) Not to mention, more M&A deals are being announced left and right and IPO stocks are set to beat the IPO market in 2000. The general atmosphere surrounding stocks is bullish.
Of course, some of today’s loss is simply investors taking money off the table before Bernanke’s words are heard. This is customary when awaiting the Fed’s decisions on interest rates and fiscal policy.
Technical Analysis: Dow Correction Is Expected
True, there’s meant to be some kind of correction after such a lofty rise. The Dow has put on 10% in gains since mid-March 2007.
On a daily scale, you’re seeing extremely high overbought RSI, beyond the 75 territorial marker.
It’s true: I told our Founder Christoph Amberger the other day that I believe we’ll see 13,500 by the end of the month. And I still think I’m perfectly on point.
The Dow needs to return to its 50-day Moving Average in the near-term in order to continue on. This may take the shape of the last major correction on the Dow in February 27, following news that Chinese and American economies wouldn’t grow as much as expected. That one-day wiped more than 400 points off of the Dow’s value.
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As always, for safety purposes, you should always hold some insurance, aka hedged puts, in your portfolio exactly for moments like these.
If we do see a drop like that, it will most likely be due to the Fed announcement. And if we see such a swift drop, expect a slow rise up to current levels in order to retest the resistance line around 13,250. If the rally accepts support, it should hit 13,500 by the end of May, early June.
Technical Analysis: The Tricky History of May Trading
But be forewarned by The Stock Trader’s Almanac, which is the bible for historical market information. The month of May can be a bit tricky. From 1965 to 1984, 15 out of 20 May month trading sessions were down. But between 1985 and 1997, it gained for 13 straight years.
A little tricky, huh?
The worst six months due begin in May, it’s a proven fact. Compounding a $10,000 investment between only the months of November and April since 1950 to 2005 would have grown your portfolio to gains of $534,323.
Taking the same $10,000 and investing from May to October every year since 1950 to 2005 would have given you a loss of $272.
For those of you out there looking for a bullish indication, the Dow Jones Transports recently posted a new 52-week high and is about to do so again. While the Industrial Average is fairly flat and slightly down today, the Transports have gained 60 points.
Maybe there are still some gains to be had in May?
Just be careful out there.
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Ann Sosnowski is a small and mid-cap stock analyst for Taipan Financial News. She is the editor of Diligent Investor, a monthly newsletter that balances conservative and moderately risky investments that pertain to current market trends. She is also the editor of Diligent Investor Micro-Cap Hot Sheet, a monthly newsletter that finds the hottest penny and micro-cap stocks on the market.
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Related Links
Technical Analysis: The Longest Winning Streak Since 1927 (courtesy of MarketWatch)
Technical Analysis: Sell in May and Go Away? (courtesy of CNNMoney)