Friday May 28th, 2010
Sell in May and Go Away?
Which direction is the stock market headed? With the recent pullback, are stocks cheap and is it a good time to buy? Or is this the beginning of another bear market? It's been a crazy month. Actually, it's been a crazy year. The stock market has had one of its strongest bull markets of all time, nearly doubling in value since March of 2009. The market topped out on April 23 and has since dropped about 12%, which is a strong pullback during a bull cycle, but nothing out of the ordinary. The general rule of thumb is that once the market has dropped over 20% it is then considered a bear market. Thus, the market as of right now is in a corrective phase within a larger bull market. It could also be the start of sideways action in the market, neither bull nor bear. However, as I have cash on the sidelines I'm trying to understand if this is just a pullback and a buying opportunity or the beginning of a stronger down trend.

Bullish signs: The all-important 200-day moving average is still rising, RSI is indicating the market is oversold (although less so after today), Chinese stock market had a follow-through day, leading stocks showed some chutzpah today, Gary K started buying today, and the FUD on which the market has been going down, is in the end, just FUD.

Bearish signs: The global markets are in a down trend, sentiment is bullish, bad volume patterns, high volatility, most leading socks have fallen, today's big turn-around day was accompanied by anemic volume, a follow-through day has not occurred in the U.S. markets.

Of all the signals, the 200 day moving average is the most important in determining the overall trend of the market. The minute this indicator starts falling, I will be completely out of the market (including 401k) in an instant. However, in the past, some of the most opportune times to buy have been when the market falls below the rising 200-day moving average. Thus, I will be anxious to buy once a few more bearish signs are no longer valid. Ideally, I'd like to see some sideways action with less volatility for the next two or more weeks, as I feel this correction has just started and it is a bit premature that it would end so quickly. However, the market does its own thing and we just have to follow its signals. Tuesday marked the first day of an attempted rally, so tomorrow could signal a follow through day. I'm not buying into this market yet, as I'd rather be a day late than a day early, so for now, I am waiting for a few more signals to appear.

May: This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, October, March, June, December, August and February.
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Friday July 02nd, 2010

Rich says:

The strategy of staying out of the market from May to the end of October has had a good track record. Also, there is an even stronger 4-year presidential cycle strategy which says that the first two years of the presidency are usually bad, followed by two good years (getting ready for re-election). The presidential strategy predicts that the US market will rise at least 40% from the 2010 low to the 2011 high. On the other hand, 2009 did not follow the strategy (up a whole bunch after the 2008 drop).