Sell in April and Go Away?

04/23/2012 7:00 am EST

Focus: MARKETS

Jack Adamo

Editor, Jack Adamo's Insiders Plus

The Wall Street adage, “Sell in May and go away,” may be happening a bit earlier this year, writes Jack Adamo of Insiders Plus.

If there had been any doubt that the Federal Reserve is targeting stock prices as a way to punish savers and drive money into riskier assets, recent weeks have put those doubts to rest. For the second time in just three weeks, the Fed recently reacted to consecutive severe down days on Wall Street by reminding the world that it would keep interest rates low through 2014.

Bernanke announced it himself last time, entirely out of left field; this time he sent Janet Yellen, one of his lieutenants, in his place. Again, there was no context from which the remarks arose, other than the market’s behavior.

Promises of more quantitative easing were also in the air. "Further easing actions could be warranted if the recovery proceeds at a slower-than-expected pace," according to Yellen.

This was in direct contradiction to recently released Fed minutes. The inflation hawks and doves were quite contentious behind closed doors. Perhaps some of the Fed’s Board of Governors wandered into a supermarket lately.

It is worth noting that Yellen’s announcement came on Wednesday evening, just before Thursday’s Initial Unemployment Claims came in 13,000 higher than the prior week, which itself was revised 10,000 higher. Reports of the death of the US job drought may have been greatly exaggerated.

Nonetheless, the Fed’s announcement had the desired effect. Wall Street reacted as any addict would when assured it would get its next fix. It jumped for joy, joy being 181 Dow points. But a funny thing happened on the way home from the party. The Dow gave back 137 of those points the next day and major averages ended the week down 1.9%, despite the dose of monetary meth.

Still Unclear
The economic strength seen earlier in the year is showing signs of significant deterioration, as measured by the Citigroup Economic Surprise Index. I don’t put any faith in Citigroup’s stock analysis, but Annaly Capital’s management gives credence to this particular economic report, and I trust Annaly’s judgment here.

The index stood above 90 in early January, but closed the quarter at just 18.9. That’s quite a plunge.

Notably weak was real disposable personal income, the same metric that the Economic Cycles Research Institute has been warning about since the fourth quarter. Real disposable personal income was up only 0.32% year-over-year, well below the already weak 1.8% pace in 2010 and still weaker 1.3% for 2011. What is worse, RDPI per capita turned negative, down 0.4% year-over-year.

In other words, Americans, on the whole, have less money to spend.

Some of the flight to safety went into gold, which greatly energized our Main Portfolio. However, last year gold started the spring strongly by rising while stocks fell, but later moved into lockstep with them, losing a good portion of its gains and bottoming at the same time, December.

Still, gold beat the market for the 11th year in a row, and any pullbacks would be only a short-term issue. Profligate Fed and fiscal policies ensure that gold will go much higher in the years ahead.

For the stock market, the near-term prognosis is less clear. Election years are usually bullish, and the Fed is pulling out all stops to make sure this one is no exception.

There is little or no real effect these efforts can have on the economy at this point; the velocity of the money printed in the last few years has, so far, been extremely slow. But the stock market can operate contrary to logic for long periods. In the short- to intermediate term, sentiment rules.

Technical Signs
From a technical perspective, the underlying strength of the market is fading fast. New highs minus new lows on the NYSE peaked on February 3 at 387 and fell to just 15 on April 13. The NASDAQ topped out the same day at 254 and is now at minus-1.

The cracking of the heretofore indomitable NAZ is giving some market technicians pause. I’m obviously no expert in these matters, but I’d rather have the underlying trends with me than against me. Hence, our substantial cash positions and hedges bring me some comfort.

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Related Reading:

A New Era of Bad Money

How Do We Keep Americans Working

Hawks and Doves and Monetary Policy

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