May Day is here and so far on this day, the market is turning … you guessed it … down. Why not, after yesterday’s record close on the Dow? Will it be a “sell in May, go away” deal this year? As always, we will see, but in the meantime, I will have to refine my trading strategy.
· In case you don’t spend your days pouring over charts, excel spreadsheets full of indicators, and more market models than you can shake a stick at, there is a very large disconnect happening in the market currently. And since it is quite rare to see the degree of divergence that is occurring, it is worth devoting some time so as to understand what the heck is going on.
The divergence referenced above is the Dow and S&P 500 are doing quite well, but the Russell 2000 (RUT) is experiencing a strong down trend. Since early March, the RUT has dropped some 95 points, which is quite a percentage drop for the index. This is a problem for me because I trade small-cap stocks. True, I benefit from the large- and medium-caps going up as I am also an investor, so, I have a hedge, but the fact remains as long as the small caps are taking a hit, I do as well.
So what to do? Well, I have been thinking about a change in strategy for some time now, and, as is often the case in life, the change I have been thinking about is now a change I have to do. Oh, I know the small caps will make a comeback, once the investment world accepts the market will continue trekking into record territory
When the investor class feels risk on is the way to go, the money will flow back into small caps and the negative positions I now hold will turn positive. In the meantime, though, I will take my remaining cash and make it work in the bigger arena.
You see, there is no rational reason for the current volatility in the market. It is all the chatter from the talking heads and other such fluff that has the market all worried about valuations and tops.
Valuations, although not the best ever, are fine. The P/E ratio of the S&P 500 is a bit high at 18 or so, but it is nowhere close to the 124 of May, 2009. When you look at the other metrics for the index, specifically the earnings per share, the valuation looks decent.
As to a top in the market, well that is not a worry either. The market has lots of room to go higher, once everyone gets past the “wall of worry” the breathless media has erected.
The fact is the market has no reason to go down, other than to correct from time to time, but it does have one really good reason to go up – the global economy is improving and the US is leading the way.
· U.S. consumer spending recorded its largest increase in more than four and a half years in March, cementing views the economy ended a dismal first-quarter on solid footing.
The US consumer is gaining confidence in the US economy, and this is it, everything, the whole kit and caboodle, so to speak. If the US consumer is confident and spending, the rest of the world will benefit economically and the market will go up. Valuations will improve and any concerns about the market topping out, being too high, or in any way not right will disappear like our water here in California is during this hot spell.
Anyway, I have to go to work. I have to figure out how to make money until my small babies come home.
Trade in the day; invest in your life …
