Choppy conditions for markets in May
by Peter Switzer
It’s sell-off time again but it’s May and regular readers know that I was going on about ‘sell in May and go away’ for months. I also predicted a couple of months of choppiness. Well, this is choppiness!
You might also recall that Lance Lai, my charts guy, also told us that the charts pointed to a down period four weeks ago.
Overnight, shares headed south on new worries about euro-debt and a slower US economy than was expected.
It’s interesting that market reports say investors are escaping more risky assets, which kind of explains just about all selling of shares, but it’s the magnitude of the risk that determines the sell off.
The big risks
First, the S&P 500 was only down 8.3 points, or 0.62 per cent, to 1329.47 but since late April the market has had a downward bias. In case you didn’t pick it, that's a ‘sell in May’ reaction.
Second, the VIX or fear index is up to around 18 but this isn’t evidence of widespread spooking. Any reading under 20 or even 30 is not enough to get you super-worried.
Third, defensive stocks are doing well compared to cyclical stocks.
Fourth, options and futures close out soon and this can be negative for stocks.
A CNBC report shows that stocks fell over four per cent in May in both 2009 and 2010.
Fifth, the Yanks are getting closer to the end of the QE2 monetary expansion in late June and this has to worry some investors.
Sixth, economists have downgraded their forecasts for the US economy, taking their guesses from above three per cent to below it, but they are still predicting unemployment to fall and the S&P 500 to go into the high 1300s, from its current 1329-level.
Overnight, the Empire State Manufacturing Index dropped to a level not seen since December last year and prices paid for component inputs rose strongly. This suggests growth is slowing and inflation is starting to be noticed at the factory-level.
Seventh, Europe is again grappling with the debt predicaments of Greece and Portugal. This is a black cloud that will hover for a while again, like last year.
Eighth, Reuters says the likes of George Soros dumped a massive gold stake – something like five million gold ETF shares – and this kind of action can unsettle markets.
Muddle through theory
As you can see, there are lots of nagging issues. However, I noted that the US economists, though tipping lower growth – not dramatically lower – still predicted higher share prices for 2011 and lower unemployment.
What I am seeing in more moderate growth and the small threat of a little inflation are things that go with a normal economy rather than the excesses of a basket case economy that needed propping up from excessive central bank stimulation.
By the way, last week’s economic readings from Europe were much better than expected, where even Greece grew above what economists were tipping.
My muddle through this mess theory still has a lot of credibility.
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Published on: Tuesday, May 17, 2011
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