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The Dow Industrials
The Smart Profits Report: Issue #416
Friday, April 27, 2007
The Dow Industrials: The “Sell In May” Theory And Where The Markets Could Head From Here
By Jim Stanton
Technical Analyst, Mt. Vernon Research
13,132.
Another day… another new record high for the Dow Industrials, as the index blasted its way past 13,100 today - just one day after cracking the 13,000 mark for the first time in its history.
To put its recent run in perspective, remember that the Dow Industrial’s one-day, 416-point tumble occurred on February 27. That left the index at 12,216. Just 41 trading sessions later, it’s tacked on 916 points - an average of about 22 points per day.
There’s no doubt about it… this market is hot right now. Perhaps too hot. And you need to beware of getting burned.
You see, the market’s run has made many folks giddy, to the point where some almost expect the market to keep rising indefinitely, dishing out quick n’ easy gains in the process. But stock markets don’t simply rise without pausing for breath - especially at this time of year.
That’s because there’s just a few days to go now until one of the market’s most notoriously sluggish periods…
Shakespeare With A Twist: Beware The Ides Of May
In Shakespeare’s play Julius Caesar, a fortune teller warns Caesar to, “Beware the Ides of March.”
It turned out to be a profound warning - and I’m going to use a little poetic license here and pitch it forward by two months and apply it to the stock market instead.
You’re probably familiar with the old Wall St. adage, “Sell in May and go away.” Over time, this has proved to be an equally profound piece of advice, which basically states that the stock market endures its worst-performing period from May through October.
And May is just four days away…
To demonstrate the strength of this theory, just take a look at the statistics, tracked by the Stock Trader’s Almanac from 1950 to 2004:
- If you’d invested $10,000 in the S&P 500 on November 1 each year and sold off on April 30 (historically the stock market’s best six-month period of the year), you’d have walked away with $349,165.
- But if you reversed the process and invested your $10,000 each year during the May to October timeframe, after 54 years, you’d have ended up with a gain of just $7,102.
- That’s a difference of 4,817%.
Impressive numbers - and proof that the cyclicality of the markets and seasonal tendencies should not be dismissed. In 2006, for example, the S&P 500 concluded a six-month rally by topping out at 1,326 - right on cue in early May. The bears then took control, pushing the S&P down almost 8% over the next six weeks.
But there are always exceptions. And in a surprising reversal of the historical trend, the bulls raced back and fired the index up 13% from a low of 1,220 in mid June. And despite occurring in a mid-term election year when the market usually sinks, the rally continued and ended up exceeding the early May highs.
So what’s on tap this year? Here’s what my charts are telling me…
Breaking Down The Dow And S&P 500
In my market update to you on March 17, I said: “… with the Dow Industrials, Dow Transports and all the small-cap indexes having all notched up new all-time highs over the impressive 7-month market rally, my pattern recognition system has projected higher targets. And although these stock market milestones have yet to be reached, my intermediate to longer-term analysis tells me that the February highs will eventually be taken out.”
The chart patterns were spot on. By the week ending April 20, all the indexes had made new highs for the year but the question is: Where do they go from here?
Since mid March, the S&P has rallied almost 9.5% and is getting overbought. However, it has yet to reach my longer-term upside targets, along with most of the other indexes - and although they’re getting close, May (and a potential selloff) is just around the corner.
- Dow Industrials: The next minimum upside price target on the Dow Industrials is around 13,125, but it could reach the 13,200 area before the bullishness subsides.
- S&P500: Below is a daily chart of the S&P 500. As you can see, my pattern recognition system projects the next upside target to be around 1,500. Again, though, with the momentum we’re seeing, it could trade up to the 1,510 area before the rally runs out of steam.
Chart Courtesy of Trade Navigator Software: http://www.genesisft.com
The Bottom Line: Dow Industrials & The S&P
Here’s the bottom line: If the Dow and S&P move up to their next minimum upside targets between now and mid/late May, the “Sell in May and go away” scenario may turn out to be a good move this year.
But it will also depend on how the Nasdaq and smaller-cap indexes are performing at that point. At the moment, the charts patterns on the Nasdaq 100 and Nasdaq Composite are pretty complex, so determining their upside targets is much more difficult.
If the Dow and S&P begin selling off prior to reaching the upside targets mentioned above, the indexes are probably going to correct and then consolidate for a while before heading back up to those target prices.
The “Sell in May” theory shouldn’t be your sole reason for taking action. Like any other indicator, it’s just one of a number of tools you can use to make your investment decisions.
For now, however, all the equity indexes are flashing intermediate-term buy signals. But with corporate earnings season winding down in May, there’s a decent chance that the markets could top out over the course of the month.
Good trading,
Jim Stanton
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Today’s Smart Profits Cribsheet
- As a technical analyst, Jim Stanton uses pattern recognition to identify bullish and bearish trends in both indexes and stocks. It’s a vital tool in determining when a breakout or pullback is set to occur. For more information, check out Smart Profits Issue #317: Continuation Patterns: Cashing In On Technical Analysis.
- Shares of Apple (Nasdaq: AAPL) blew past $100 for the first time today following a blistering earnings report that saw profits surge 88% to $770 million ($0.87 per share) on revenues that climbed 21% to $5.2 billion from a year earlier. The company cited a 36% jump in Mac computer sales (to 1.5 million) and a 24% rise in iPod (to 10.5 million) sales for the bulk of the growth. Apple shares ended the day up $3.49 (3.6%) to $98.84. And with the company’s new iPhone product set to hit the market in June, the company again confirmed that it expects a further boost in sales. Current forecasts put iPhone sales at 10 million in 2008.
- In the oil world, industry behemoth ExxonMobil (NYSE: XOM) said it enjoyed its best first-quarter performance ever - despite profits slipping well below Wall Street estimates. For the January-March period, profits rose 10% to $9.3 billion ($1.62 per share), compared with $8.4 billion ($1.37) in Q1 2006. Revenues fell from $88.9 billion a year ago to $87.2 billion, due to crude prices being $5 less now than in the first quarter of 2006. That was well short of analysts’ estimates that called for revenues of $100 billion.
Related Articles:
- The DJIA Index: As The Dow Goes 14 For 16, Beware The Momentum Indicator Warning Signs
- The Dogs Of The Dow: Forget the January Effect & Kick Off 2007 With Some Rebound Profits
- Dow Theory: The Most Important And Powerful Concept In Technical Analysis
