Sell in May and go away? Not yet.

05/02/2017 2:47 am EST

Focus: FUTURES

Carley Garner

Senior Strategist and Broker, DeCarley Trading, LLC

The e-mini S&P has another run left in it that could potentially reach 2422ish, asserts Carley Garner, Senior Strategist for DeCarley Trading, and author of four books, including “Higher Probability Commodity Trading” (July 2016).

The stock market, specifically the e-mini S&P 500 futures contract, has made historical gains since the US election night lows.  Stock traders might not be aware of how deep the S&P futures market traded on that night, but they are certainly aware of the subsequent rally.  Those trading the e-mini S&P are probably mindful that the market has made a nearly $30,000 move per single futures contract! 

We are obviously cognizant of the arguments of being a stock market bear.  The price to earnings ratio is currently excessive (above 25.00).  It has only been above this level a few times going back to the late 1800s. 

The market is not cheap.  Further, investor expectations and complacency is at concerning levels.  On multiple occasions, I’ve witnessed comments made by those who aren’t close to the financial markets which insinuated that there was some sort of “guarantee” of a 7% annual return when invested in equities.  While in the long run this might continue to prove to be a valid assumption, in the short run it is far from the truth. Particularly when the market is at such lofty levels. 

chart 1

Our friends at the Consensus Bullish Sentiment Index have been reporting that roughly 70% of those polled were bullish in the equity market.

Similarly, the American Association of Individual Investors reports that 38.1% of those polled were bullish with 31.7% bearish and 30.2% neutral.  In this particular index, a reading of over 30% in the bullish or bearish category is generally considered excessive.  Reading it another way, the AAII Index reveals that 68.3% believe the market will either hold gains or add to gains.  Markets simply cannot sustain themselves when the majority of participants are bullish and they have likely already taken action based on their sentiment. 

In short, we might be running out of fresh buyers in the coming months.  Nevertheless, we don’t expect the selling to come in immediately.  Instead, we believe the e-mini S&P has another run left in it that could potentially reach 2422ish (trendline resistance on a weekly chart).  In addition, technical oscillators aren’t at overbought levels yet and are suggesting upward momentum.

Not only is the weekly chart suggesting that there is room to run on the upside before significant selling could potentially come in, but seasonals and the currency market should support stocks for the time being. 

According to the Stock Trader's Almanac, the month of May has been feast or famine for the equity markets.  From 1965 through 1984 the S&P was down 15 of 20 months of Mays but between 1985 and 1997 May was the best month of the year with an average gain of 3.3%.  While the months of Mays have been less impressive in recent decades, it is still a relatively strong month for equities.  In fact, since 1950 in post-presidential election years Mays rank #4 for the Dow, #3 for the S&P and #1 for the NASDAQ.  For this reason (and others), the rally could continue to grind higher for the time being. The old adage, "Sell in May and go away" has slowly become a fallacy.  The market turns have been happening later in the year (June/July).

chart 2

We also see some moderate support for the equity markets in the coming weeks from the currency markets.  The US dollar index futures contract traded on the ICE exchange appear to be holding the 98.50 level and in a position to move higher to trade toward the upper end of the trading channel.  If so, this should keep a floor under stocks.  After all, over the previous several months the S&P and the greenback have moved in the same direction roughly 70% of the time.

In short, we are in the camp believing stocks are overvalued but we aren’t in any rush to get bearish until the S&P probes above 2400 or we get further into the murky summer months.

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