Global: Buy in May and go away. But what - and why - do we buy?
Last December we issued a piece on this; today we follow up and see how well our "pattern prediction" worked. In short: extremely well.
At the time, we asked how much markets had risen under new U.S. Presidents who had advocated "change" versus those who had not during their campaigns. We found that the "changers" drove the up by an average of 10% from their January inaugurations to the end of the following April; the "non-changers" prodded the market up a mere 4% over the same period.
Encouragingly, this pattern has repeated itself...but what is next? Crucially, how - and why - do you make money off this? We link the Economic Clock® to our investment advice.
The pattern repeated itself marvelously: from 20th January, 2009 (when he was inaugurated our first piece on this, we mistakenly wrote that inaugurations occur in November: apologies) until the end of April, the S&P rose from 805 to 874, or by 8.5%.
So what next? My view has been dead wrong since 9th March, when the S&P500 bottomed at 676 and climbed by 39% to 939 on 8th May. But we have been right since the peak of 10th October 2007: our recommendations are down by 5% while the overall market is down by around 40%.
Nevertheless, I stick with my view: the global Economic Time® keeps worsening, so how can profits improve? This view is particularly acerbic against the backdrop of valuations which are at dangerously high levels. More at the week end, but I am afraid that the bear is returning....
Adding credibility to the worsening Economic Time in America is today's survey of economists, released on page 2 of the Asian Wall Street Journal. In our diction, America's excess supply of goods has to intensify. Quoting relevant passages from said article:
- "...the recent increase in the U.S. saving rate is the beginning of a major behavioral shift.";
- "The economists on average expect the unemployment rate to climb to 9.7% by the end of the year, with two million more jobs lost over then next 12 months, even as growth returns to the economy." (my italics)
- nearly half of the economists said that it would take 3-4 years for growth to return to a solid trajectory, and
- Just under one third of those surveyed said that they doubted the sustainability of the recent stimuli by the Fed.
How to make money off this?
One way to short the U.S. market is to buy the ProShares UltraShort S&P500 ETF. We have recommended this to subscribers since 15th November 2007, and it has risen by 8.6% since. (The market has fallen by 40% since we launched this recommendation, so our advice has out performed considerably).
Why is and will this "short" position (keep) rising? Because -
- nobody really believes the sustainability of the market rally (see the previous four bullet points); America's Economic Time® keeps getting sicklier on account of rising unemployment and worsening news concerning those banks who are trading below the radar screen, exacerbating an "excess demand for money" to those in need of loans;
- the chickens of irresponsibility have come home to roost, so banks have to raise more and more capital: tough to see how markets rise if the supply of scrip goes up, isn't it? More about this foggy transparency over the week end from me;
- so expect second quarter profits to disappoint strongly, except for specific "fool-proof" sectors, and
- May is traditionally a weak month from a seasonal perspective:with school holidays looming, Bloombergs and terminals are replaced with beaches and tents.
