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Stock Markets - Sell in May and Go Away?

Stock-Markets / Corporate Earnings Apr 25, 2007 - 12:47 PM GMT

By: Hans_Wagner


Investors who want to beat the market need to be aware of the key trends that will impact their portfolios. To some this year looks like a classic sell in May and go away. The theory is that the market goes into hibernation for up to six months from May to November, and during the other six months it gets back into gear and makes its move up. Part of this idea comes from the larger traders taking time off for their summer vacations.

I am not so sure we will see this happen this year, as I expect many traders and investors will be looking to react quickly to any further signs of market weaknesses. I also believe we are likely to see much more volatility in the months ahead, which should present some good buying opportunities for some quicker trades.

So what leads me to this thinking? Besides the adage of ”Sell in May . . .” we have the higher than desired level of inflation, slow down in corporate earnings and continuous pressure on the housing sector. This will compel investors and traders to pay close attention as they will not want to be caught on the wrong side of a trade. This means stock picking will be very important. William J. O'Neil wrote an excellent book on how to pick stocks titled How To Make Money In Stocks: A Winning System in Good Times or Bad, 3rd Edition that investors should find useful.

The Personal consumption (PCE) is one of the Federal Reserves' most favorite indicators of inflation. It consists of the actual and imputed expenditures of households including data on durables, non-durables and services. The PCE measures the price changes of consumer goods and services indicating the level in the rise in prices as a measure of inflation.

The most recent PCE has risen 0.1% each month for the last three months, with the core PCE running at 2.4% for the last twelve months. This is above the Fed's generally accepted target range of 1 – 2%. So what are the chances that the PCE will fall back to the target range? Not good. The price of corn, soy beans and other grains are rising due to the demand for ethanol. This will increase the cost of all food products that use these staples, such as chickens that produce eggs, feed for cattle and hogs, milk, cereals and bread. This is not likely to help lower inflation and the Fed is not likely to lower rates. As a result investors will need to monitor the Fed throughout the summer to see what they do and say.

Next we are in the middle of the first quarter 2007 earnings season and growth in earnings range between a paltry 3% increase to highs of 7-8%. All of these forecasts are below the double digit earnings growth we have experienced for the last several years. What we are experiencing is a slower economy that is causing corporate earnings to slow down as well. One of the drivers of growth for corporations is the continued growth in major emerging economies such as China and India. I am looking for companies that have a substantial portion of their earnings coming from international operations to experience higher growth than those that are primarily looking to earnings growth within the United States. We are experiencing the impact of the global economy and I believe it will change our markets. With the slow down in the economy, investors and traders will be paying more attention to earnings results for each quarter of 2007.

Finally, on the housing and mortgage front, Equifax, one of the three large credit reporting agencies, reported that the percent of mortgages nationwide in default has risen to 2.87%. And in some states the rate is above 5% like in Texas, California and Colorado. We also have not yet seen all the moves up from the adjustable rate mortgages issued in the last several years, which could make the problem even worse. So far this problem has been contained within the mortgage and housing sectors. For now I am expecting this situation to continue as the rest of the economy seems to remain on solid footing, with employment expanding and most sectors growing. However, these sectors also must be watched closely over the next several months to be sure the problem does not expand to other parts of the economy.

So should we sell in May and go away? I do not think so. We should continue to see good opportunities and I expect the market to remain volatile as investors continue to worry what will happen next. Also, the global economy continues to grow and China will keep on spending at least up until the 2008 Olympics. They want to show the world they are a first rate nation. As a result this will be a stock pickers market through the summer and into the fall. However, we need to remain wary as the higher volatility should cause sudden drops, representing buying opportunities, once they are over.

By Hans Wagner

My Name is Hans Wagner and as a long time investor, I was fortunate to retire at 55. I believe you can employ simple investment principles to find and evaluate companies before committing one's hard earned money. Recently, after my children and their friends graduated from college, I found my self helping them to learn about the stock market and investing in stocks. As a result I created a website that provides a growing set of information on many investing topics along with sample portfolios that consistently beat the market at

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