Will the Sell in May Mentality Cause the Dow Jones to Fall?

By Dale Gillham | Published 04 May 2020

There is an old adage of sell in May and go away, which is a tradition of selling stocks and then coming back into the market after summer. The premise is that the market will fall away in May and then rise later in the year, but is this an old tale and not a good one to follow.

Right now, the market does not reflect what is occurring in the economy, as it is rising strongly without reason. In April, the Dow Jones Index and the S&P 500 had their biggest month in over 30 years, and I believe a lot of people are buying on hope rather than smart research. I also believe people are buying because they think the corona virus outbreak will be over very soon and everything will return to normal in the next month or two. In my opinion, this is very dangerous thinking because the world has changed dramatically, supply chains have been interrupted and may stay that way for a while, and we all know viruses come in waves.

When we look at the US earnings season, we see that nearly 300 companies in the S&P 500 have reported, with roughly two thirds reporting their earnings are slightly above analyst expectations.

The big issue I see is that while companies are reporting, they are not giving guidance for the next few quarters. Right now companies are trying to predict a moving target, so they are putting off making any projections until they get more certainty from the government. Analysts, in general, are confused as to what to think for the coming few quarters, as guidance is not there and estimates are all over the place. This makes the stock market unpredictable and dangerous.

Interestingly, there are 11 Stocks in the S&P 500 that are still up 20 percent in price this calendar year. Gold Miner Newmont is the best up 40 percent, while Biotec Company Regeneron Pharmaceuticals is up 39 percent, and Citrix and Netflix are up 28 percent. There are many others still in positive territory, however, if the market takes another dive, these returns might be wiped out.

In a strange move, cruise lines were up last week with Norwegian up 27 percent, Carnival Corp up 16 percent and Royal Caribbean up 14 percent, with all three in the top 13 stocks in the S&P 500.

That said, with the market down on Friday, all of these stocks had double digit falls. Looking at the Cruise industry, it has been far from normal over the past two months and I expect it will be for quite some time, therefore, the rise on the cruise line stocks last week was pure speculation.

For now good luck and good trading.

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