Sentiment Speaks: Sell In May? Ain’t No Way

This was quite a week we just had in the markets. Was your head spinning?

In this week’s article, I am going to discuss the employment report published on Friday, as well as a report that was put out by the Fed this past week.

Employment Report

Early in the week, we saw an 80-point decline in the S&P500. Was there any consensus reason cited for such a decline? Nope.

Then on Thursday, we saw a major ramp up in buying in the S&P500 right into the close, as well as the overnight session. Was there any consensus reason cited for such a strong rally? Nope.

And, now comes the big head scratcher. The reported jobs number announced on Friday came in almost 750,000 less than expected. That means that economists were off by almost 75% based upon their initial expectations. It was such a surprise that Steve Leisman of CNBC had to double and triple check that it was not an error as he was announcing the number on live TV. And, as the LA Times noted: "In hugely disappointing report, job growth slows sharply and unemployment rises."

So, with such a surprisingly major miss and poor jobs report, one would have thought that the market would have declined on Friday, right? Nope.

(Let’s not even discuss the ridiculous situation in which the United States now finds itself, wherein it is paying people to stay home and then gets shocked when the jobs numbers do not meet their growth expectations.)

I am quite certain that most investors who attempt to rationalize market movements were initially shocked at the jobs report, and likely expected the market to drop based upon this news. I am also quite certain they were shocked again when the market went up after such a major miss on the economic expectations.

But, wait. After the shock wore off, they came to their senses and explained to all us plebians that the reason the market went up is because a poor jobs report only means that we can continue to expect the planned government intervention, which is what really caused the markets to rally.

Let’s be honest. Does anyone really believe that a good jobs report would have caused the administration to scale back on the stimulus they desire to pass? I certainly hope no one reading this article is that blind to reality. Ultimately, this type of “logic” is akin to scratching your right ear with your left hand by going over the top of your head.

Again, it is my job to highlight the seemingly major disconnects between economic news and the stock market. At the end of the day, if you are really astute and are paying close attention, you would realize that none of the news or events we experienced this past week had any true reasonable affect upon the market. The market simply danced to its own tune.

And, as our members were noting how green their accounts were, and were quite appreciative of our ability to tune out the noise and focus only on the relevant analysis, one of our members penned the following on Friday regarding what he has learned from us:

“I HAVE acquired some rather remarkable skills in trading, that have enabled me to increase my net worth by an astonishing and rather gratifying degree in just a few short years; prior to that time I think it would be fair to say that I was little more than another chunk of fresh meat to be chewed and swallowed by the algos and the vagaries of market forces that I really never understood. An apt analogy would be that I was speeding down a crowded Interstate in heavy traffic, navigating by my rearview mirror, by relying upon fundamentals, and the news... my friends . . .I truly need to give credit where credit is due: I could never have acquired these skills were it not for our Fearless Leader, Avi Gilburt.”

For those that have read my articles over the last decade, the following statement will not come as a shock to you: The stock market is not nearly as affected by exogenous events as you may believe. As I have said many, many times, while a news event can act as a catalyst to a market move, the substance of that news event will not necessarily be determinative of the direction of the market move. And, Friday was the perfect example.

As I cite quite often, in a paper entitled “Large Financial Crashes,” published in 1997 in Physica A., a publication of the European Physical Society, the authors, within their conclusions, present a nice summation for the point I was trying to make above:

“Stock markets are fascinating structures with analogies to what is arguably the most complex dynamical system found in natural sciences, i.e., the human mind. Instead of the usual interpretation of the Efficient Market Hypothesis in which traders extract and incorporate consciously (by their action) all information contained in market prices, we propose that the market as a whole can exhibit an “emergent” behavior not shared by any of its constituents. In other words, we have in mind the process of the emergence of intelligent behavior at a macroscopic scale that individuals at the microscopic scales have no idea of. This process has been discussed in biology for instance in the animal populations such as ant colonies or in connection with the emergence of consciousness.”

Ultimately, it is the general market sentiment which interprets the news, and provides the direction for the events we encounter. So, what is really important to understand is whether we are in a positive sentiment trend or a negative one. During a positive sentiment trend, bad news is “discounted,” and the market continues to rally. Again, this is what we experienced on Friday.

As Ralph Nelson Elliott noted back on October 1, 1940:

“The causes of these cyclical changes seem clearly to have their origin in the immutable natural law that governs all things, including the various moods of human behavior. Causes, therefore, tend to become relatively unimportant in the long term progress of the cycle. This fundamental law cannot be subverted or set aside by statutes or restrictions. Current news and political developments are of only incidental importance, soon forgotten; their presumed influence on market trends is not as weighty as is commonly believed.”

In fact, Elliott went so far as to proclaim that “[a]t best, news is the tardy recognition of forces that have already been at work for some time and is startling only to those unaware of the trend.”

So, now you can better understand why people say that surprises come to the upside in a bull market.

Fed Report

The other matter I want to address from this past week is a report that was put out by the Fed. Many parsed this report for clues as to what the Fed is going to do. Well, as for me, I have no need to know what the Fed will or will not do. My sole concern is what market sentiment is saying to us regarding the market trend. You see, when the Fed fights the sentiment trend, they are absolutely powerless and are beholden to the market trend in the same manner as is each and every other market participant. I have written about this many times in the past. You can review this recent article which highlights when I have fought the Fed and won: Sentiment Speaks: I Fought The Fed... And I Won

But, you can simply look at this chart to understand the proposition that the Fed is powerless when it fights the sentiment trend:

So, when I read the Fed report, one line stood out to me:

“asset prices may be vulnerable to significant declines should risk appetite fall.”

Allow me to explain this Fed-speak if you did not understand it. You see, the Fed is saying that the market will drop when people stop buying. Well, no sh—Sherlock. Just brilliant!

Now, tell me when risk appetite will fall and we can have a reasonable discussion. Oh wait . . . they can’t.

“We really can't forecast all that well, and yet we pretend that we can, but we really can't.”

That was quote said by former Fed Chairman Alan Greenspan. I will leave it at that.

Now that we have dealt out our normal dose of market reality, on to our market prognostication.

As we approached the month of May, we all hear the common refrain “Sell in May, and go away” many, many times. Last year, if you followed this common retrain and sold as you entered the month of May, you missed a 200-point rally. And, this year, May is likely providing us a nice return as well.

As for the rest of 2021, from my perspective, I suggest that adherence to this refrain would be based upon whether you are a short-term trader or a long-term investor. If you are a long-term investor, then you should heed the title of this article: “Sell In May? Ain’t No Way!”

From where I am sitting, this market still has much higher to be seen in 2021. But, that does not mean we will not see a selling event in the near term.

Back in October of 2020, I tried to alert those willing to listen that we will likely see a 20%+ return in the S&P500 in 2021 (Sentiment Speaks: Prepare For 20%+ Returns In 2021). At this time, we have already seen 13%, with my expectation for more to be seen later this year.

Then in February of 2021, I warned that we would see a pullback in the market, followed by a March melt-up (Sentiment Speaks: March Melt-Up Madness). And March provided us with a 250-point rally.

Then in the middle of March, as we were approaching the conclusion to that 250-point rally, I warned that we would see one more pullback, but the rally thereafter in April will likely be even better than the March rally (Sentiment Speaks: March Rally Was Good - April Will Be Even Better). And, in fact, the market pulled back into the support region we cited, and then began the rally I was expecting in the last days of March. That rally lasted throughout all of April and exceeded the size of the March rally, as we saw a 370-point rally off the pullback low we were expecting in March.

Now, I am telling you that as long as the market retains its smaller degree support in the 4190-4205SPX region in the coming week, I am expecting an initial move to 4250, followed by a pullback and continuation rally to at least the 4330SPX region. Ideally, I would much prefer we extend up towards the 4400SPX region, but I am uncertain at this time as to whether we will see such extensions in the coming weeks. And, it looks like this can all happen within the month of May. So, I am not sure it would have been wise to sell as we entered the month of May.

But, the main point is that once we move into that higher target region, I think it is reasonable to expect what may be the largest pullback thus far in 2021, as we look towards the month of June. If you would like further details, you can feel free to join us.

Lastly, I want to remind you that we provide our perspective by ranking probabilistic market movements based upon the structure of the market price action. And, if we maintain a certain primary perspective as to how the market will move next, and the market breaks that pattern, it clearly tells us that we were wrong in our initial assessment. But, here is the most important part of the analysis: We also provide you with an alternative perspective at the same time we provide you with our primary expectation, and let you know when to adopt that alternative perspective before it happens.

As I have said many times before, this is no different than if an army general were to draw up his primary battle plans, and, at the same time, also draws up a contingency plan in the event that his initial battle plans do not work in his favor. It is simply the manner in which the general prepares for battle. We prepare for market battle in the same manner.

So, while I will never be able to tell you with certainty how the market will move in the coming weeks, months, and years, I present you with enough information to know where my primary perspective is wrong so that you can adjust in order to take account for the alternative situation. And, until such time that the market proves our primary perspective is wrong, we will continue to follow our primary perspective, which at this time is pointing us towards the 4400SPX region.

By now, I hope you recognize the difference in our analysis approach, other than the accuracy thereof. We strive to view the market, and utilize our mathematically based methodology, in the most objective fashion as possible, no matter how crazy it may sound. Moreover, it provides us with objective levels for targets and invalidation. So when we are wrong in the minority of circumstances, we are able to adjust our course rather quickly, rather than fighting the market like many others you may read.

So, while I hope I am helping many of you in maintaining an objective perspective within this non-linear environment we call the stock market, I want to wish you all well in your future trading and investment endeavors. As of now, I maintain my long-held expectation to see the market at the 6000SPX region in the coming years, of course, unless the market tells us otherwise. And, thus far, it has provided us rather clear and accurate guidance.