The sell in May strategy is normally associated with exiting at the end of May before the Memorial Day holiday. However, the markets have now been down slightly for two weeks in anticipation of that late May decline.
The S&P touched support at 2,040 on Friday and -71 points off the April 20th high at 2,111. That is about 3% and so far is only a normal bout of profit taking although it has taken nearly three weeks to reach that level.
If the S&P moves below 2,040 the likely summer target is back in the 1,900 range. The Fed will be in play for June, the political campaigns are shifting into high gear and loose lips could be sinking stocks at every turn. The market is normally weak when the general election is in full bloom and candidates are slinging mud at an ever faster pace. This particular campaign should be the worst in decades for dirt digging and mudslinging. Add in the promises to make economic changes that could sink the economy even further and this could be a tough summer.
The Dow has short-term support at 17,500 and again at 17,400 and 17,135. Then it becomes a long drop to the 16,000 range with a couple of speed bumps on the way down. Most of the Dow components have already reported with Disney the only release this week on Tuesday evening. That means the Dow stocks are going to be fighting post earnings depression and are not likely to be moving significantly higher.
The Nasdaq is already at five week lows and targeting 4,600 as the next support level. Tech earnings have been a mixed bag but those that did disappoint are in crash mode. The biotech index is also dragging the Nasdaq lower. Biotechs are struggling on a number of fronts with major declines in companies like Valeant and Endo Pharma spoiling sentiment. Gains due to potential takeovers are being offset falling revenues from a rapid increase in generic sales. Political candidates have repeatedly complained about the high price of drugs.
The economic calendar is very light and the only report with market moving potential is the Retail Sales for April on Friday. That could be a miss and it could sour market sentiment. The Fed heads will be trying to talk up the potential for a rate hike at the June meeting but analysts claim there is no chance. December is the next real target.
The earnings calendar is also lackluster with a flurry of retailers reporting and they are rarely market positive. Disney is the highlight on Tuesday.
This is the last week of the Q1 cycle and earnings quality is declining. Smaller companies typically struggle more in a difficult environment and their earnings reflect this challenge. Offsetting that is less impact from the strong dollar. However, this is the week where investors will give up chasing the next earnings beat and the market typically begins to weaken.
Crude prices are in rally mode because of the drop in production of one million barrels per day from Canada, -300,000 bpd from Nigeria and another -500,000 bpd from various other producers. Traders seem to be overlooking the nearly 1.0 million bpd gain from Saudi Arabia, Kuwait, Iran, Iraq and the UAE.
The fire in Canada could last for weeks and the electrical transmission network has been severely damaged. It would be weeks before that is repaired. Individual wells do not need electricity because they have generators of their own. However, pipelines, transfer stations and the oil sands facilities all need electrical power to operate. This suggests the decline in production could be long lasting. WTI is up 87-cents on Sunday afternoon for this reason.
I am still looking for a significant buying opportunity in the weeks ahead. While a surprise summer rally would be nice, it would definitely be a surprise.
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