As the "Stock Traders Almanac" has pointed out numerous times, " In the last six years only March 2003 encountered a major low point for stocks just prior to the invasion of Iraq. March 2000 and 2002 were officially bull market tops for the S&P 500, and in March 2001, the NASDAQ collapsed 18.2% from the 7th to the 29th.
So, how will the market react come May? You will probably see more of the same. The typical "Sell in May, and go away" will probably ignore the seasonal myth until the fall. We may in fact witness a top in the market, as well as a meaningful bottom, during the last 6 months of the year. This translates into a sharp decline similar to what we saw in 1987 rather than a long drawn decline that tortures an investor for several months.
With the massive amount of information available to investors, the Wall Street Gang is dealing with a more educated small investor. The only way the "Gang" can gain a strategic advantage over the small investor is to use the element of surprise.
As an example, the seasonal patterns of the market have not been a reliable indicator of the future directions in the market for quite some time. Why? The "Gang" knows that the small investor is more educated, and these investors know about the seasonal tendencies as well. This is probably why the markets have not been following their normal seasonal patterns.
In years past, seasonal tendencies were techniques used by the big boys. Not anymore. In order to suck the small investor in before pulling the rug out from under them, the "big boys" have to find a more stealthy approach.
With energy and commodities trading at multi-year highs, consumers are beginning to feeling some real pain. Longer term interest rates are beginning to climb, and consumers with adjustable rate mortgages are throwing in the towel. The 42 month cyclical bull is sprinting toward the pasture, while the real estate market is on the verge of a painful decline.
Once investors receive official confirmation that the economy is in contraction, the market is vulnerable to a sharp and sudden sell-off that could drive the major indexes down 10-20%. The worst case scenario (down 20%) would come if the economy contracts and inflation continues to be a problem.
For now, I don't think the "Sell in May, and go away" strategy will work right away. The market will probably go higher and suck in as many as they can before a sharp 1987 style sell-off begins.
