Stocks – Sell In May And Go Away?

We’ve gone “dead flat”

And I’ve gone to “neutral book”.

I’ve used some leveraged ETFs to go to a balanced book neither betting long nor short (but holding on to my large dividend payers).

This chart shows it’s a global “dead cat bounce” to “dead money” flat. No sense taking all the risk for no gains. Also notice that we are back at the moving average lines on the S&P 500 but at a ‘lower high’. If this fails to advance through those lines, we’re most likely headed down.

I’m left to wonder if this is the “sell in May and go away” announcement…

Flash Crash Yearly Chart

Flash Crash Yearly Chart

The most typical behaviour in an ongoing “bull market” is a brief wobble here, then a punch through the moving averages to the upside, extending the run. The alternative is a ‘rollover’ where we fail to advance beyond the last tops and where we pause a long time at the moving averages, then fall away to the downside. This feels to me more like the latter than the former.

It’s also possible a lot of folks are just a bit stunned from the “Flash Crash” and just stepping aside until the dust settles. Much as I’m going to “balanced book” with essentially equal long and short bets.

In particular notice that DMI is still “red on top” and MACD is more “going flat sideways” below the zero line, meaning ongoing slow drop, than it is “crossover to the upside” meaning return to bull market run. MACD does often “stutter” like that at panic bottoms (look back at the last one, you can see a sideways bit just before it finally turns up. But that “up turn” tends to come after a “higher low” in the RSI indicator, and so far we only have one dip in the RSI.

All in all this says “nervous time” and a ‘retest of that bottom’ is likely in the next few days. So I’m neutral book and waiting for the confirm to get back in to an upside bias bet. If we start to fall away from the moving averages and prices print a “lower high” followed by a downside run, well, then it’s time to move to a bearish bias and trade more short funds, neutralizing with leveraged long funds at the appropriate “plunge” moments. We’ll cover that strategy if the need arises.

For now, we’re at a market decision point, so we wait for a few millions of folks to make up their collective mind…

The 10 day 15 minute interval chart shows a startling flat phase. That is likely to resolve to the downside short term.

These charts can be opened to a much larger and clearer view, if desired.

Daily Flash Crash Stock Rebound

Daily Flash Crash Stock Rebound

Notice how the DMI / ADX line is saying “just no momentum at all”.

Live Chart

10 Day Hourly with balanced book tickers

10 Day Hourly with balanced book tickers

While those prior two charts are static, this one is a ‘live chart’. It has QQQQ and PSQ (short of QQQQ) along with IWM (Russell 2000) and RWM (short of Russell 2000) so you can see how they are inverses of each other. So if you own QQQQ, you can ‘neutralize it’ with an equal dollar amount of PSQ. (Or you could use 1/2 the dollar amount of QID that is a ‘double short’ similar to how QLD is a “double long QQQQ”. The RUT is the Russell 2000 actual index; but not a tradable ticker. You can chart it, but IWM is what you can buy. Go figure… FWIW the ticker for the ‘double long’ RUT is UWM and the double short is TWM).

Why not just sell? Because some times you have positions bought with “unsettled cash” and can not sell them for 3 days… but you don’t have to be married to them… and it’s OK to pick up a second “friend” for the party and just go neutral while you wait. Tomorrow I can sell out of which ever one is right for the resolved direction. This is called “legging in” when buying a mixed position one part at a time and “legging out” when selling it in steps. Alternatively, one “leg” may have settled, but if you sell it, that cash is ‘unsettled’ for 3 days. Easier just to ‘go neutral’ with an offsetting position (if bought with settled cash) then you can take either direction at any time via a sale and not worry about buying into that new directional trade with “unsettled cash” and being married to it for 3 days… Yeah, day trader cash timing stuff…

Oh, and say you have a nice stock or fund that is about to pay a nice dividend, but if you sell, you don’t get the dividend… Yeah, you can buy a ‘similar’ inverse acting fund and neutralize the market position while collecting the dividend. I’ll do this sometimes with my oil and gas funds. If oil is headed down, I’ll buy an “oil down double short” fund. So I’ve hedged out the oil price change risk, while still getting the dividends… It’s a nice trick to have available. If you are doing options, you can just buy a put against the stock for the same effect.

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About E.M.Smith

A technical managerial sort interested in things from Stonehenge to computer science. My present "hot buttons' are the mythology of Climate Change and ancient metrology; but things change...
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7 Responses to Stocks – Sell In May And Go Away?

  1. KevinM says:

    I’m still all out of the SP500 after three years of playing bumps – can’t shake the feeling that feeling that another big dip is coming.

    Looking for a new hobby. I was going to try gold, but its boring: Buy and wait for a world currency crash. I want to make 5-10 moves a month, which has made the SP500 perfect.

    The Euro has been sinking vs the dollar. Do you think it will keep going? Ten years ago it was 0.9 and its at 1.2 now with a real possibility to fall apart. I’m thinking about getting in and out of a Euro-short ETF, hoping for a volatile downtrend, that will be like the SP500 on its recent uptrend.

    If I can get the underlying trend right, the mistakes I make guessing bumps are easier to correct.

  2. Wes says:

    Chief,

    I’m still doing what I do, selling strength and buying weakness, while holding a core position when my psychology indicators are bullish as now. So, I bought at the close.

    We’re oversold again after today, and so far the oversold indicators are at a higher level indicating a bullish divergence.

    We’ll be maximum overbought sometime around Monday week (the 24th), depending of course on what the market actually does.

    My psychology indicators are at a 2 on a scale of 1 to 6 with 1 most bullish. The valuation is a 1 and with the yield curve we currently have, monetary conditions are quite constructive.

    I live for times like this. Of course the market may crash again, but the odds are heavily against it.

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  4. E.M.Smith says:

    @Kevin M:

    Currencies are hard to trade some times as the central banks will “do things” that are not market driven. So the “bumps” can be major surprises.

    My GUESS and opinion is that it will continue to drop to about parity at worst, most likely with a central bank defense at 1.20 or so. I use charts to time currency trades just like any other ticker. It works “OK”. But some are trickier than others. See the recent posting on the Yen…

    Basically, it comes down to one thing: Does Northern Europe (i.e. Germany) win and stabilize the currency? Or does Southern Europe win and turn it into a Lira redux?

    If I had to bet, I’d bet on a bumpy ride to a new Lira… with decent odds of a spit / break up of the Euro Zone in about 2 years.

    @Wes:

    I’m a little uneasy with the present market. We’ve got the Ministry Of Stupidity talking about a redo of regulations (and that always scares off some percentage of folks) and we’ve got a herd of folks just burned in the Flash Crash (many of whom just came back after the Last Crash) and some fraction of those folks are just going to pack it in for a while.

    Then add in that it’s May…

    So I’m expecting a modestly dead Friday, then a “Dip” sometime Monday (at most Tuesday) and a rise. That’s when we find out which way this resolves. With the present flat trend, I’d not be at all surprised to see a ‘flat roller’ for a while. Bobbing up and down and going nowhere. But we’ll see. The indicators I use are still saying it’s a swing trade higher, but at this stage of a market, show swings can be pretty short. Like maybe even just the 3 days we had already.

    The most dodgy time is when returning to the SMA stack from the bottom side after a long run higher. That’s the typical time of a ‘roll over’ with a few months of drop, and it can be a sickening drop. My mantra for swing trades is “manage the risk and the reward will take care of itself”. So I’m going to “balanced book” until the SMA stack is perforated, or we drop away from it. Yeah, I might miss a day trade or two, but I’ve avoided a lot of risk…

    I do find it rather fascinating to watch how your style and mine interact. Each surfing slightly different waves…

  5. Wes says:

    Chief,

    That was a great call you made to go flat.

  6. E.M.Smith says:

    @Wes:

    Yeah, sometimes I’m lucky ;-)

    It would have been “more great” if I’d had the guts to buy a leveraged short directional trade… but then again, I’m into managing the risk…

    It was that 3rd day of ‘dead flat’ headed into a weekend with bad news flow… that, and the indicators reminding me that they were saying “downtrend at present” and “rebound has lost momentum”. So I just hit the FLUSH handle, combed my hair, and headed for the bar ;-)

    FWIW, don’t know if I’m being crazy or not, but on the oil sell off I added some cheap oil and gas trusts. I’ll trade out of them at the next oil report, most likely, but it looked like a reasonably easy trade. Down 2 – 3 % now, pays 9%-12% dividends monthly, and inflation in the wind… I usually don’t like to try to “catch a falling knife”, but on my “to do” list for “now” is “learn how to catch a falling knife and not get hurt”…

    I expect monday they will swoon some more, but usually Wednesday oil pops after a big drop. The oil inventory comes out and it isn’t as bad as expected. I’m pretty sure there is some semi-random component to when individual tanks and tankers are drained and filled, so if one week is a ‘surprise drop’ the next is often ‘surprise rise’. My unfounded suspicion is that a couple of supertankers may get in a week late one week (so a ‘drop’) or arrive a bit early (so a jump) the next.

    With the oil slick headed near The Loop, I’m willing to bet that at some point there will be a couple of delayed tankers and a surprise drop in inventories. We’ll see in about a week…

    Took off some of my “flat” protection today. Letting that money “settle” for next Wednesday… Still have a large cash position though.

    Also, I’m going to be busy flying this weekend and may not be able to properly watch things for a couple of days. Good time to cash out…

  7. P.G. Sharrow says:

    Bears make money; bulls make money; pigs never make money.
    Oil looks to be a safe bet, as long as BP controls the flow of oil through the futures pits and their big wigs can stay away from congress looking into their operations.

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