Simplespread

Old Wall Street Saying:
Sell in May and Go Away (?)
(Simplespreaders as Sideline Sitters)

Question: What do 1962, 1966, 1970, 1974, 1978, 1982, 1986, 1990, 1994, 1998, 2002, and maybe 2006 have in common?

1) They are the names of years, stretching back over almost half a century.
2) They are four years apart.
3) They are even years.
4) They are mid-year election years.
5) They are years in which the stock market bottomed after a significant decline.

1962 - The Dow Jones Industrial Average dropped 27% from November 1961 to June 1962. The excuse given was JFK's confrontation with US Steel over price increases.
1966 - The Dow Jones Industrial Average dropped 25% from February 1966 to October 1966. Rising interest rates needed to cool an overheated economy was given as the cause.
1970 - The Dow Jones Industrial Average dropped 36% from November 1968 to May 1970. The implosion of popular stocks with "-ex" at the end of their names, along with Penn Central's bankruptcy and Lockheed's near bankruptcy weighed heavily on the market..
1974 - The Dow Jones Industrial Average dropped 44% from January 1973 to December 1974. Need we say more than "Arab Oil Embargo" and "Watergate?"
1978 - The Dow Jones Industrial Average dropped 26% from September 1976 to March 1978. During this period of time, inflation and interest rates were raging higher.
1982 - The Dow Jones Industrial Average dropped 24% from April 1981 to August 1982. The threat of Mexico reneging on its loans sent panic through the world's markets.
1986 - No selloff in 1986 on the carryover from Reagan's re-election two years earlier. But a delayed crash occurred from August 1987 to October 1987 when the Dow Jones Industrial Average plummeted 36%, including the history making 23% (-508 points) wipeout on October 19th.
1990 - The Dow Jones Industrial Average dropped 21% from July 1990 to October 1990. The S & L bailouts, banking stocks damaged by real estate problems, and "Desert Storm" preparations in response to Saddam Hussein's invasion of Kuwait all gave the market a kick in the shins.
1994 - The Dow Jones Industrial Average dropped 10% from January 1994 to April 1994 as Greenspan hiked up interest rates because he thought he saw inflation on the horizon.
1998 - The Dow Jones Industrial Average dropped 19% from July 1998 to August 1998 when Russia defaulted on its debt sending the Long-Term Capital Management hedge fund into insolvency.
2002 - The Dow Jones Industrial Average dropped 37% from January 2000 to October 2002. The aftermath of the dot.com bubble and 9/11 were enough to knock the legs out from under any market.
2006? - The Dow Jones Industrial Average dropped ______% from _____ to _____. The only question will be what is the excuse this time?

The market is cyclical. Because we know the market is mass psychology in action, we know that the psychology is cyclical. Opportunities come and go as the herd instinct takes the markets up, then takes the markets down. Call it the herding instinct.
We are content to sit out periods of time, waiting for the right windows to open. We know there are only a handful of opportunities each year when the market goes into its periodic funks. We know that we must be liquid at those times so that we can take advantage of opportunities when they present themselves. Therefore, we know we must sell the rallies and buy the declines.
What we don't understand is, considering the above timeline of recorded history, why other investors insist upon a fully invested philosophy of buy-and-hold. We know the market goes into a decline every so often. Nobody knows how long it will last. Sometimes it is just for a short period of time - a few but devastating months. At other times, it can last for years. Either way, it takes a larger percentage gain than what you lost just to get back even. (A 25% loss requires a 33% gain to get even.) That's making a hard job more difficult.

Since we aren't long-term clairvoyant (right along with everybody else), we buy strong stocks and sell call options during market selloffs. Then we wait for a rally to take away our stocks through exercise of the calls. We then retreat to the sidelines and wait for the next chance to play.

So, we'll agree that you should sell in May (because of the early month rally) but we won't go away; we'll just wait for the next opportunity, because that's Simplespreading.

The worldwide washout continues. The Generals are still trying to lead, but the soldiers won't follow. Bear market hedges have come to the fore as they should.

Metals & Mining held onto #1 but took a drubbing. Aerospace/Defense is hanging tough at #2. How Real Estate jumped up to #3 is a mystery. Big dividend-paying REITs look stable in an otherwise scary market. Transportation continues strong in the #4 spot. Manufacturing holds strong in the #5 position. Automotive refuses to weaken and holds on to the #6 spot. Utilities jumped up to the #7 position through virtue of not losing much ground over the past few weeks. Tobacco, always reliable to remain steady in a shaky market, advanced to the #8 position. Banking continues strong in the #9 position. And Food & Beverage rounds out the Top Ten.
The markets (stock and commodity) are vastly oversold and a snap-back rally could easily take place. However, so much technical damage has been done we don't see resumption of the 3-year rally anytime soon. Especially worrisome is the fact that overhead resistance has now formed above many stocks and sectors. Encouraging signs point to a possible resurgence of the health care areas - Health Services and Drugs. While Drugs has made a good move, Health Services remains on the bottom of the heap. With the demise of Materials and Construction and Energy, we have to keep a close eye on the other leg of the three-legged stool that supported this market rally over the past 3 years - Metals & Mining. New leadership could reside in Manufacturing which is holding fast to its position in the Top Ten.

As is implied in this week's newsletter entitled, Sell in May and Go Away, we must be ever watchful for continued weakness throughout the summer. The November election is only 5 months away, and political troubles are always troubles for the market.

Sector	9Dec05 to 9Jun06	Week of 9Jun 06	Visual Chartist Commentary
Metals & Mining	+13.26%	-10.02%	Fully down into support. Many good-looking opportunities BUT, as we've warned many times recently, this rally is getting old. Sector leaders over a 3-4 year period usually don't do well during the next few years. Support for the actual yellow metal is still a bit lower at $575, some $30 farther down from here.
Aerospace/Defense	+10.54%	-2.85%	Still a good 10% above support.
Real Estate	+7.31%	-0.76%	Bounced off support 3 weeks ago. But even now, volatility is too low to find any good opportunities.
Transportation	+7.31%	-4.91	Bounced off the high end of support on Thursday. Airlines, so-so. Air Freight well above support. Railroads got hit hard. Many stocks looking weaker in the face of this selloff. Shipping is looking terrible. Wonder what that means for world trade???
Manufacturing	+7.09%	-7.39%	Support for the group is still about 10% lower. Some stocks have broached their own areas of support.
Automotive	+6.71%	-6.95%	Still hard to believe the charts, but this sector is sitting right on its support. One has to hold their nose in order to get interested here, but the numbers always speak louder than words.
Utilities	+6.30%	-1.85%	Having gone nowhere for over 9 months, Utilities ascension is due more to not having dropped with the market than any bullish chart formations. But we'll see how it plays out.
Tobacco	+5.49%	-2.06%	Holding tough - just like a bear market hedge should. But not enough volatility to even look at. What a waste.
Banking	+4.67%	-3.22%	Low volatility discourages much interest.
Food & Beverage	+4.55%	-3.05%	Dropped down into upper support area on Thursday, but not much of interest here.
AND THE REST...
Media	+4.26%	-3.21%	Still needs a big push to get through its three-year high resistance, but once it does, this sector could have some good candidates.
Leisure	+3.83%	-3.30%	Dropping down very close to its support. Too bad it dropped out of the Top Ten, but it's still a contender.
Conglomerates	+3.14%	-4.12%	Some good looking stocks, but volatility too low.
Drugs	+2.61%	-2.75%	Looking better all the time.
Telecommunications	+2.38%	-4.97%	Right at supports. Must hold here.
Energy	+2.31%	-7.69%	Losing steam fast. Individual stocks still have promise, but sector is beginning to look questionable. The majors have been flat for a year. Secondary issues spending more time marking time.
Insurance	+1.10%	-2.42%	Dull and uninteresting.
Specialty Retail	+1.03%	-2.86%	Flattening out over the past year.
Diversified Services	+0.80%	-2.54%	Going nowhere.
Consumer Durables	+0.80%	-5.87%	Very bad week. Zero return over past two years.
Dow Jones Ind. Avg.	+0.75%	-3.16%	11,000 didn't hold. Chart still shows support at 10,750 that could give way to summer rally.
Consumer Non-Durables	+0.69%	-2.60%	A very poor showing for a sector that should be up there with Tobacco, Food & Beverage as weak market hedges.
Chemicals	+0.66%	-5.95%	The past month has been a disaster. A real disappointment.
Financial Services	+0.40%	-4.07%	Big drop down into support. But relative strength has dissipated.
Retail	-0.92%	-2.31%	Looking worse all the time.
Wholesale	-2.55%	-4.84%	At support, but has no strength.
Electronics	-2.78%	-7.14%	Right at support. Too bad it has lost its leadership.
Computer Software & Svcs	-3.74%	-3.87%	A big disappointment.
Computer Hardware	-4.55%	-4.71%	Weak, but if it's every going to rally, this is the place to make a stand.
Materials & Construction	-5.17%	-8.36%	Obviously our warnings of Residential Construction pulling the other areas down have materialized. But it was a nice, long run while it lasted.
Health Services	-6.72%	-1.79%	Looking better. But still has a lot of work to do before we can seriously take stock of the sector.
Internet	-13.68%	-2.87%	What's that song? "Been down so long..."
Statistical Data: TeleChart 2005