Equity insight: What to do with an early May downturn

I still fancy the market's intermediate prospects; however, there are some continued signs of potential shortterm weakness ahead. The first two trading days of the month traditionally have a bullish bias to them as many investment programs receive funding around the beginning of each month and May is no exception. From 1950-2010, the S&P is 42-19 on the first two days of May for a median gain of 0.49%. When the market doesn't perform with a seasonal tailwind, it can often be an indication of market exhaustion, or as I usually like to simply state, 'When the Market goes against the Seasonals, Go with the Market'.

The below table shows the S&P's performance on the week after those 19 occasions where the S&P was down on the first two days of May. As you can see, the S&P is 7-12 the next week for a median loss of 0.73%

WHEN THE FIRST TWO DAYS IN MAY ARE DOWN

FOLLOWING
YEAR DAY1 DAY2 DAYS1-2 WEEK
1955 0.21 -0.89 -0.68 0.40
1956 -0.45 0.02 -0.43 -0.48
1966 -0.18 -1.16 -1.33 -3.08
1967 -0.18 -0.18 -0.36 -0.07
1970 -0.10 -2.54 -2.64 -0.97
1971 -0.63 0.48 -0.15 -1.13
1972 -0.91 -0.57 -1.48 -1.26
1976 -0.71 0.54 -0.18 1.47
1979 -0.08 0.04 -0.04 -2.22
1980 -0.78 0.11 -0.67 -0.81
1981 -0.07 -1.54 -1.61 -0.73
1983 -1.41 0.14 -1.27 2.23
1985 -0.81 0.36 -0.46 1.63
1986 -0.15 -0.16 -0.31 1.30
1989 -0.17 -0.32 -0.49 -0.95
1996 0.06 -1.71 -1.65 0.32
1999 1.46 -1.67 -0.24 1.77
2000 1.09 -1.50 -0.42 -2.36
2010 1.31 -2.38 -1.10 -1.52
2011 -0.18 -0.34 -0.54 ?

#UP-DN = 7-12
AVG%CHG= -0.34
MED%CHG= -0.73

Perpetual Bulls might argue that 5 of the last 8 "week after's" have been positive and the two day loss is modest this year, but boy, that was a nasty May (-8.21%) we had last year in this same spot.

Market Laboratory

Moving Average Analysis

The S&P is 10.94, 2.89 and 0.79% above its 200, 50 and 10 DMAs. Below are the 30 closest matches in the last 30 years to that combination listed in order of best match. Only the best match in a one month period is considered.

200/50/10 MOVING AVERAGE STUDY

%ABOVE/BELOW
DATE RANK 200DMA 50DMA 10DMA FORWARD S&P PERFORMANCE
TODAY 10.94 2.89 0.79 1MT 3MT 6MT 12MT

20030909 1 10.72 2.86 0.74 1.52 3.62 11.48 9.31
19951201 2 11.06 3.11 0.77 1.47 6.16 10.24 24.72
20031029 3 10.84 2.36 0.79 0.96 8.21 6.28 7.83
20030711 4 11.13 3.19 0.68 -1.76 4.00 12.40 11.49
20040301 5 11.02 2.31 0.79 -1.22 -3.00 -4.33 4.71
19951017 6 11.32 2.50 0.83 2.26 3.34 9.34 20.49
19850719 7 10.23 3.03 0.89 -4.48 -4.15 6.82 21.13
19850705 8 9.63 3.06 0.79 -0.99 -4.83 9.54 30.79
19950615 9 11.23 3.14 0.63 4.24 8.61 14.75 23.97
19890628 10 11.80 2.74 0.68 5.02 6.99 7.63 9.77
19971209 11 10.25 2.71 0.64 -4.93 7.84 14.62 21.29
20040218 12 11.53 3.08 0.62 -2.56 -5.23 -4.92 4.32
19950602 13 10.95 3.38 0.94 2.30 5.88 13.98 25.65
20031015 14 11.42 3.34 0.88 0.34 8.15 7.84 5.87
20040209 15 11.13 2.96 0.45 0.07 -3.61 -6.54 4.58
19950523 16 10.68 3.59 0.71 4.00 5.40 13.21 27.89
19970109 17 10.49 2.23 0.70 4.60 0.76 20.23 22.90
20031217 18 9.77 2.36 0.75 5.88 4.39 5.16 10.94
19960307 19 11.29 3.39 0.58 0.34 3.01 0.31 23.15
19951229 20 10.24 2.48 0.60 1.35 4.80 8.88 22.87
20061215 21 8.75 2.92 0.90 0.26 -2.44 7.42 2.86
20030725 22 10.15 1.99 0.78 -0.50 3.03 14.31 8.76
19950501 23 8.91 3.23 0.75 3.74 8.82 13.60 27.29
20031226 24 10.81 3.61 1.00 5.43 1.11 3.52 10.42
19860212 25 11.37 3.35 1.06 7.67 10.01 12.67 27.62
19960605 26 9.49 3.57 0.77 -3.10 -4.27 9.72 24.32
19890718 27 12.29 3.00 1.07 4.43 3.14 2.06 9.92
19990330 28 13.01 3.04 0.64 2.65 5.55 -1.39 4.30
20110106 29 10.93 4.18 0.75 2.91 4.84 6.50 6.50
19910415 30 13.08 3.15 0.89 -3.31 0.31 2.58 9.21

#UP-DN = 21- 9 23- 7 26- 4 30- 0
AVG%CHG= 1.29 3.01 7.60 15.49
MED%CHG= 1.41 3.81 8.36 11.21

HISTAVG= 0.73 2.16 4.37 9.01

Wayne Whaley is a Systems Engineering graduate from Georgia Tech who takes an engineering approach to tape analysis. He is a registered CTA, co-owner of Witter & Lester and the 2010 MTA Charles Dow Award winner for research surveying various tape measures. For more insight see www.witterlester.com.

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