'Sell in May and Go Away' or 'Buy When it Snows and Sell When It Goes' are popular seasonal slogans heard at this time of year.
Jeffrey Hirsch, Publisher of Stock Trader's Almanac offers compelling research which suggests that these maxims indeed produce peak profitable performance. His back tested 60 year prime seasonal indicators suggest that buying in October and selling in May yields optimal long term returns - not to mention the added benefit of long and lazy summer holidays by the seaside!
With markets having produced an exhilarating record stock & commodity 2 year run and a return to the over extended years of 2006-08 it appears that 'seasonality' once again may rule the day. I do believe that markets have somewhat 'normalized' from the recent 'end of the economic world' scenarios - but I also think that long term seasonal cyclical pattern analysis may also be forever changed.
Recent vicious and brutally arbitrary CME margin pressure has forced massive liquidation not only from underlying commodity futures contracts - but also from many of the related ETF and various other Fund accounts. A sudden and severe broad sell off has ensued with bearish pundits prematurely heralding a 'popping' of pre-orchestrated commodity bubble. As a result of this self induced mini-hysteria, proclamations of everything from a world wide economic slowdown to the imminent threat of higher Euro/Asian interest rates have been thrown into a potentially toxic volatility mix!
What we are left with in the carnage & aftermath is an entire host of well capitalized & very profitable resource corporations which sure look really 'Swell in May' to me! At minimum, we will be more than likely be facing at a summer filled with intense and competitive M&A and takeover activity.
Impressive improving seasonal economic performance continues to be announced in the US in spite of a small 'toe stub' in April unemployment claims. Goldilocks porridge isn't quite perfect yet - but the great news and momentum of a record surge in the month of March (US$172b) in the long suffering US manufacturing sector has got to be a major relief. It finally looks like outbound export containers are returning to Asia filled with US products. Job openings have reached a 3 year high and even battered Miami real estate is turning over at an impressive clip.
On the head wind side of the ledger - Greece is trying to figure out how to pay up to 25% in annual interest costs in order to continue to borrow after getting lowered 3 junk levels to 'B.' Evidently getting their fiscal and monetary budget under control is 'Greek to Them?' US Federal finances are also a mess with funds once again being depleted by the weekend. Talk about living pay check to pay check! And I am not sure anyone really knows what a US Dollar is actually worth which also does not engender significant long term economic strength?
Microsoft believes that popular Internet telephone service Skype SA is worth a cool US$8.5 in spite of never having made a nickel. A sweet payday for EBay and Silver Lake Partners. MSFT pays $50 for each of the 170m mostly European users in the hopes that Skype can be profitably vended into their suite of various software products. The purchase takes a 20% chunk out of MSFT's US$50b cash hoard. It does leave enough to take a run at Yahoo again - now that it is worth almost half of the $US47b that MSFT bid 3 years ago.
The DJIA and S&P both continue very strong relative performance having absorbed any selling pressure to date. The DJ Transports are consolidating recent all-time high levels and are usually a fairly reliable precursor to further market strength - especially considering the wild and woolly energy volatility as of late. The attractively valued multi year high NASDAQ also appears to be potentially well positioned for a 'contra-seasonal' summer rally.
The reeling commodity sector is trying to come to grips with the rather severe and shocking recent margin increases. Once again, inexplicably the 'speculator' has become public enemy #1 and has been effectively dispatched and/or cleaned out. All the 'regulatory officials' have accomplished is introduce sharper and more violent volatility in the weeks to come. My intermediate concern is that with the constant over hanging threat of the arbitrary CME, and political regulatory types, the commodity 'golden goose' may have been cooked for the next few months. Long term I have little doubt that significantly higher prices will be paid for almost any basket of goods.
Gold currently outperforms Silver on a short term basis and should find substantial support in the $1,425 area. Silver would represent a low risk & ideal entry level in the mid to low US$30 range. For bargain hunters, the cheapest Gold and Silver can be found on the TSX in the form of producing mining stocks.
Oil has also endured 'margin pressure' and reports of substantial world wide over supply - everywhere but at the gas pump. I will be surprised if crude oil substantially breaks the US$90 support level considering seasonal driving factors and increasing real world wide demand of over 90m bl/day. The senior producing Oil & Gas equities are offered at very compelling and attractive current levels.
Copper is more of a concern having broke US$4/lb and having formed a rather formidable & substantial intermediate top. Copper will find substantial support in the still very profitable US$3.50 area.
My personal favorite - Natural Gas quickly rallied to long term resistance of US$4.75/mcf before folding to rising margin sentiment into the low US$4/mcf range.. I believe that Nat Gas has formed a substantial long term weekly bottom in the US$3.50-4.50 range with upside implications to at least US$6/mcf before the kiddies go back to school.
The Toronto Stock Exchange has been struggling since breaking the key 14,000 level and now faces critical earnings reports from the heavily weighted bank and financial issues. The TSX has successfully tested the key 13,250 level today having corrected 1,000 points (7%) since mid April.
My focus is on the very attractively priced and valued resource and materials sector. I view this spring and early summer as ideal and lower risk accumulation periods for longer term portfolios.
Canadian Tire pays a substantial 50% premium for sporting goods retailer Forzani Group and is a current indication of reasonably priced stock market valuations.
Beleaguered RIM is having to endure a full frontal short selling assault from south of the border and has broken into new multi low territory at Cd$42/sh. RIM should hold long term support of Cd$40 especially considering current valuation and extreme short term over sold conditions. I would imagine management is actively pursuing a significant merger partner as part of their (hopefully) long tern strategy.
Bottom Line: Ample liquidity and outstanding corporate earnings performance has driven North American markets for the past two years to 'normal' and 'reasonable' valuation levels. South of the border markets continue to impressively outperform on a relative basis absorbing excess selling while being contained within 3-5% of recent multi year high levels. North of border the key TSX is fixed at a very critical support level (13,250) and would need to breech 13,750 to resume it's upside potential. Individual 'bottom up' valuations are compelling within a significant portion of the broad based resource sector. Assuming upcoming bank earnings continue to outperform analysts estimates the TSX may garner upside strength once recent commodity 'margin issues' have been settled, the M&A season begins in earnest, and the Stanley Cup finds it's new home!
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