The market has slipped into a short-term selling phase that could pick up steam over the coming weeks. The late-day bounces are interesting. They could become 2-day turn-arounds that lure more dip buyers in. But overall the market has more work to do on the downside agenda in the next 2 months than it does on the upside one.
Interestingly, BofA/ML put out a note this morning talking about the same themes which they title "Summer of Shocks." On Sunday, I'll also show you their very interesting chart of a market addicted to low rates.
Sell in May? Absolutely!
New highs are close, but there are several reasons they will be fleeting
The bull market may not be over, but the current stock market rally off of the February correction lows is built on a shaky foundation.
That foundation is the “easy for longer” Federal Reserve which kept the US dollar down and saved crude oil and other commodities from the deflationary abyss.
If the Fed is the cornerstone of the rally, then the questions become “Why is the market so dependent on very low interest rates?” and “When will they pull the rug?’
I made an obvious mistake a couple days back getting rid of TVIX. The VIX made a rather large move today as fears over the Nikkei finally hit the markets. It’s been interesting watching investors and financial media shrug off Japan's situation, but it seems now many are starting to watch. There was selling across the board as the S&P 500 finished down 0.50% and the Nasdaq was hit for 0.60%. Last night I mentioned the topping pattern I’ve been seeing and my instinct was right. However, that didn’t make us money, as the Fed shook us out of TVIX.
We head into the weekend with a fear of what might happen to the Nikkei futures Sunday night. Will it head back to 2016 lows, or will a central banker save it once more? The answer is unknown, but what is very clear is that investors are losing faith in the Bank of Japan and Negative Interest Rate Policies (NIRP as I will call it).
If you’re interested in checking out Nikkei futures Sunday night to get an idea of what is coming Monday, the symbol is /NKD for most trading platforms.
Whats next for the S&P 500?
2060 in the S&P futures was a level I was watching for support. This was easily broken and we saw more selling pressure with the VIX spiking over 11%. I now expect S&P 2020 to be tested before any bounce is formed. If for some reason this doesn’t hold, I could see the half way back point at 1955 coming into play. Halfway back is found by simply taking 2016 lows to highs and finding the middle.
Earnings have been mixed, so our strategy of stock picking should work in this market if S&P can hold 2020. If that breaks I will shift strategy to looking for more shorts until 1955, where I would be looking to get long stocks in the portfolio with 100% allocation.
Economic Data and News
April University of Michigan Consumer Confidence came in at 89.0 verse 90.0, lowest reading since September 2015.
Chicago Purchasing Manager 50.4 verse 52.6 expected
New York Fed Nowcast: lowers Q2 GDP forecast to +0.8% from +1.2% on 4/15
Movers in the Markets
After oil hit my $45 target it continued higher above $46. I am looking for oil to come in a bit, but I don’t have the setup yet.
SPY volume is picking up as we saw over 125 million shares trade today. This was the first day we've seen above avergae volume since the newsletter started.
Gold has been surging higher this week and was up almost another 2% today.
Will anyone get the timing of a “sell in May” thesis exactly right? Of course not. Just like most of us didn’t in buying under S&P 1900 and again under 2000 so that we could cash in profits at 2100 in April.
But the potential reward of 3-4% gains to 2150 is over-shadowed by the potential risks of 5-10% market slides in a matter of weeks. Those are hard to escape from without some big damage to your portfolio, no matter if you are a dividend investor or a growth investor.
Worse, quick 5-10% drops can often unfold into bigger declines if enough negative catalysts line up. I think we are just one more negative Retail Sales or sub-50 ISM Manufacturing report away from a market that stops believing low interest rates can save stocks from low growth.
