Sell in May and Walk Away?

A wobbly stock market facing pressure from numerous sides could be setting itself up as a victim of one of the oldest market dangers: Sell in May and Go Away. The trend, in which early gains start evaporating as investors leave for summer vacation and shed their positions, poses danger especially when the market has a fast start to the year. That has been the case for 2011 and its sizzling first quarter.

Combine that with the recent threat of a debt downgrade from Standard & Poor's, a parabolic surge in commodity prices, and the imminent exit of the Federal Reserve from its liquidity policies — and the inclination to subscribe to the old maxim becomes hard to resist.
There is almost an embarrassment of riches for potential things to go wrong, a "perfect storm" of market danger: High stock valuations compared to book value, unrest in the Middle East, and overheated market sentiment further amplify the risks of the other aforementioned factors.
The fears are shared among market bears who feel the flat market of the past seven weeks will become a down market as the sell-in-May trend takes hold. For the summer, we recommend investors be extremely picky, in most cases turn to cash and cash-equivalent assets such as short-term Treasurys until the selling passes.
May historically has been a tricky month for stock market investors, market cliches aside.
Since World War II the month has brought seven pullbacks—more than any other—with a modest return of 0.3 percent, which ranks it eighth out of the year's 12 months, according to Standard & Poor's.
The threat of a rating cut is likely to fuel more concern that May could be a rough month.
There have been a lot of headwinds that the market has been able to withstand and continue forward progress. But now that we have the downgrade of the outlook for the U.S. and earnings that are not exactly knocking the cover off the ball, investors are probably thinking that maybe we have overanticipated good things to occur during this first half.
What's more, the market has not seemed to price in the end of the Fed's Treasury-buying program, often referred to as quantitative easing. The second leg of QE, which has entailed another $600 billion in government debt purchases, wraps up in June and will take a sizeable chunk of liquidity out of the market. Also, the Federal Reserve delivers its next policy decision April 27, which will coincide with the first post-Open Market Committee news conference from Chairman Ben Bernanke, an event that journalists are looking forward to but some investors are dreading.
We the market heading for some crucial tests of support and resistance levels that may coincide with the historical May selling period. Key levels for the Standard & Poor's 500 will be about 1,370 on the topside and then around 1,200 on the way down. A breach would signal longer-term movements in that direction. The prospect of a difficult May could prove a boost to Treasury prices and provide another leg up for commodities, where gold briefly topped $1,500 an ounce Tuesday. Markets these days are so driven by high-frequency momentum trading that any sustained slide in the market could snowball and accelerate the sell-in-May trend. An unexpected event when everything is priced to perfection could be something that really triggers quite a big fall and we keep going. These are computer programs going here, but those guys are not long-term buyers. They are not buy-and-hold candidates. You have a lot of nervous money in here.