Sell In June Is the New Tune?

The sell in May fans are speaking up as the market starts to move lower after hitting new highs in May. Are the sellers really ready to take control of the market direction short term? Is the “overbought market” ready to correct? Is this just a resting spot to deal with the downside speculation? Will the upside continue despite the weak economic picture? There are plenty of questions in the headlines and I have plenty of my own relative to the future developments for the broad market indexes, but the most important part is having the patience to wait for the answers.

Short interest jumped on Wednesday. The inverse ETFs saw a volume spike of 30-40% on average with some funds jumping 100% and more in volume. Yes, some of the money flow is institutional, but the average investor has learned how to trade these funds as well as use them to hedge their overall portfolios. SH, ProShares Short S&P 500 index ETF has an average trading volume of 3.08 million shares per day. On Wednesday the fund traded over 6.1 million shares. This is the first sign of negative sentiment for the markets since the minor pullback in April? There is never a perfect answer to direction, but the selling does shift the balance of power, at least for the day. Watch to see how the S&P 500 index handles the key support at the 1597 level. The response will provide some insight going forward.

The key reversal day on May 22nd is still in play on the downside. The testimony of the Fed Chairman, Mr. Bernanke, was the cause of the volatile move. He had stated that the stimulus would continue at the current rate of dumping cash into the economy, but then related there was disagreement among the Fed Presidents who want to reduce the amount of stimulus. That was the start of the key reversal. On Monday the transports turned negative with a break lower from the head and shoulder pattern to form a top. A shift in the trend for the transports is not a good sign short term. IYT, iShares Transport is setting up a short opportunity. Track both issues going forward as they have set up downside trading opportunities.

The beige book report from the Federal Reserve, released on Wednesday, did little to improve market sentiment. You might say it was “beige”… just plain boring. The data continued to show modest to moderate growth in the economy according to the Fed, whatever that means. The good news in the report was no signs of the spending cuts from government slowing the economy to any significant degree. The bad news was jobs continue to struggle to amke any gains of significance. The news was ignored as investors continued to fixate on the the probability of the Fed reducing the current allocation ($85 billion per month) of stimulus under the quantitative easing strategy.

Price of lumber has dropped more than 30%, Copper prices have declined more than 20% and it begs the question if it  is a negative sign for the housing market? XHB, SPDR Homebuilders ETF has dropped 8.75% since the 15th of May. While it would be an easy task to say yes… we all know there is more to the answer than that. China has contributed to the downside in both commodities as their economy has slowed. Throw in some seasonal adjustments and you could say sales of both are slower, but they are not foretelling the housing market is on a downward trajectory. The price of the homebuilder stocks have gotten ahead of themselves on the upside and a pullback to levels that are more in line with the current and future growth is healthy. WOOD, JJC and XHB are all worth tracking short term for opportunities from the current selling.

As you can see the downside signals continue to build. With all that in mind, you still have to validate the belief with what happens in reality of the markets day to day. Don’t make assumptions, be disciplined and let this all play out.