The first week of May will most likely go down in history as one of the best examples of “sell in May and go away”. Moreover, I like to remind people, nobody said it’s the first day of May. This year however, it began on May 4th, the second trading day of the new month. By the third trading day Thursday may 6th, the Dow Jones succumbed to a tsunami size wave of program selling causing the Dow Jones Industrials to drop nearly 1,000 points on an intraday basis. Many events led to this extraordinary event, first the horrible news that the Gulf of Mexico oil disaster was far worse than expected. Then the Euro currency was imploding and the media was televising riots in Greece that had turned deadly. It is in my opinion that the market meltdown was not entirely cause by a computer breakdown, but rather the possibility that a bank and or a major hedge fund was involved with massive losses stemming from a bad position in foreign currency losses. It was a margin call liquidation that I believe was the trigger that started Thursday’s decline, and then it just fed on itself. In any event, last month I was anticipating a market correction, but not to the severity and extent as we encountered. As a quick review one area of opportunity I focused on was in Equities. This is what I stated, “ S&P’s have a seasonal tendency to decline, as the saying goes, “sell in May and go away”. As I have always reminded traders, nobody said it was on the first trading day, and despite the fact the market is due for a correction, it can come in one of two ways, straight down or sideways, such as what us technicians call a consolidation phase. Of the major stock indexes, based on year to date figures, the small cap sector as represented by the Russell 2000, (Index symbol RUT), has had a parabolic move straight up registering a 15.72% gain as of April 21st . Based on the seasonal tendencies and the technical outlook in the market, aggressive option traders may want to look at one strategy such as an out of the money credit call spread. Specifically the June 740/750 spread for a credit of 4.00 per strategy. The risk on this trade is 6.00 with 55 days until expiration.” Here is a follow up, on Friday the credit call spreads had narrowed to .80. Allowing for a quicker than expected profit. One of the most important sentences in my last report was this… “This is an excellent strategy for those looking for a correction or perhaps at the least a pause in the performance value. At the very least, this is certainly the time to get aggressive on protecting your portfolio.” As of today that is a massive understatement.
What’s next? Well here is some food for thought, literally. One can look to sell short July Coffee futures on or about May 24th. If we see a rally between now and that date, especially if we trade near the monthly pivot point resistance level at 141.30, I would look for a confirming indicator, such as a MACD crossover to initiate a trade. In addition, last month’s high was 141.45. That would be a potential double top to sell against.
Also, I am looking for Sugar prices to bottom out, a little “sweet and low” so to speak. We tend to post mid- season lows on or about May 23rd. The Annual low occurs around October 27th. This market has declined very sharply from last years highs. The longer term up-trend intersects near our monthly support level. I would look to take a long position near monthly support around 12.83 use 12.42 stop.
As for equities, I do believe we belong up on the year around somewhere between 6-8% in S&P’s which translates to the 1170 – 1192 level. Do I want to be completely out of the market now? No, but I will be very selective in which stocks I will buy and certainly I will be utilizing more option strategies such as the Russell (RUT) vertical call credit spread I suggested last month.
All the best,
John Person
President
Nationalfutures.com
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