Sell in May and Go Away

The old trader's adage of sell in May and go away looks like it will be a good axiom to follow this month.  Although the market continues to spiral ever higher there are some serious headwinds and these are going to have to be dealt with during the lowest trading volume months of the year.

Typically when summer arrives trading volumes on the major exchanges diminishes.  Traders tend to take holidays and relax more and overall trading volume becomes lighter and volatility picks up.  Stocks can gyrate madly about with little or no reason other than there is little volume in the market or the stock.  This is a dangerous time to trade as moves in any direction can be magnified hence the axiom to go away and wait for a more "normal" market to return later in the year.

For those of you with substantial gains in your portfolio thus far this year I would definitely take some profit and even think about locking down the positions with put options or covered call contracts.  My reasons are many but following I will delve into just a couple.

1. Banking Index (BKX) is showing signs of rolling over.  When the banks start to trend down that is normally an early signal that there are problems in the overall market.  On a more granular level it is often said that as goes Goldman Sachs so goes the market and a review of the GS chart shows that the market could be in trouble.
2. Global growth is slowing.  Two of the metrics that I look to for a clue as to the strength of the global markets are copper and the Baltic freight rates.  Copper is a base material that is used throughout the world.  As copper prices are determined by demand and supply, a weak copper price shows weak demand.  Weak demand points to slower economic growth on a macro-economic basis.  For a graphical view of this click on the following link to see the current monthly futures chart http://www.danielstrading.com/resources/quotes-and-charts/quotes.php?page=chart&sym=HGK11
3. Tied to this indicator is the demand for shipping as indicated by the Baltic Freight Rates.  This shows the level of demand for dry bulk shippers around the globe.  These boats transport the raw materials needed to keep economies going and so a lower Baltic Freight Rate points to weaker demand for all raw materials.  For a clear view of how this rate has performed click on the following link but needless to say it is not looking very promising. http://investmenttools.com/futures/bdi_baltic_dry_index.htm
4. Finally the Federal Reserve has stated that they will end their open market purchases on time and will not extend their purchases for the time being.  How long they actually stop is anyone's guess, but without the support of the Federal Reserve I would think that the market rolls over.  A lot of people seem to already be buying treasuries expecting some sort of market draw down in the near future.  The support for treasuries seems to be stronger than what the Federal Reserve can provide on their own.  A look at the chart of the ten year T-Bill shows the support for treasuries over the last few weeks http://www.danielstrading.com/resources/quotes-and-charts/quotes.php?page=chart&sym=ZNM11

For all of these reasons I would advise that the market is looking far weaker than it appears on the surface.  May is typically a month that signals the beginning of slower volume days and this can lead to an exacerbation of market moves.  If the market rolls over I would think that it will go farther and faster than during "normal" market periods.  Do yourself and your portfolio a favor and protect your profits by selling some or all of your positions and move into cash.  Once you have a cash build-up contact me and I will provide you a fantastic rate of return for virtually no risk while you wait for the dust to settle.

One last thing to think about when you are planning your next investment - how much longer will the rest of the world support these levels of debt?