Stock market traders seem to have a saying for every type of market. "Never sell a dull market!", "The trend is your friend!", and "Don't fight the Fed!" are some of the more popular, but there are dozens of other primary examples. One that immediately comes to mind is "Sell in May and go away!". Of course, this hasn't really worked over the last few years, but stock market returns over the longer term seem to suggest a fairly significant under-performance from May through October as compared to more positive results from November through April.
So why is the title of this column "Sell in April and Go Away"? The answer is simple. Just like the so-called "January Effect" favoring small-cap stocks now begins in early December, so too will the under-performing 6-month period that used to begin in May now begin in April.
The Nasdaq Composite Index was down 2.83% last week and the Russell 2000 Index lost 3.53%. The Biotech sector fared even worse, with the most popular Biotech ETF down 6.38% last week. This same index is now down 17.50% for the month of March so far (see monthly bar chart below). The S&P 500 Index only lost about 0.50% last week, but this relative "safety" and out-performance in the big-cap stocks will soon prove temporary in my view.
While the potential negatives for stocks are mounting with each passing day (Ukraine/Russia, China debt bubble, European economic woes, ditto in Japan, liquidity concerns resulting from the apparent change in monetary policy by the Federal Reserve (tightening bias?), near record valuations for U.S. stocks, and corporate earnings forecasts that appear overly optimistic), let's add another relatively small, but important, potential negative. Michael Lewis (of Moneyball and Liar's Poker fame) has just written a new book called Flash Boys. It's about high-frequency trading (HFT), and Michael Lewis concludes that HFT is bad for regular investors. He even goes as far as to say that the stock market is now a "rigged game". Maybe so, but my reason for highlighting this comment from Lewis is that disillusion is beginning to take hold and I now believe that investors will soon begin to exit stocks en mass. It's already begun in the so-called high flyers and also many small-cap and biotech shares.
On Sunday, March 9th in this column, I published a list of the 25 Most Overvalued Stocks as of the March 7th close. Here is that same list with updates on the share prices of each as of Friday's close, March 28th (3 weeks from March 7th).
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| 25 Most Overvalued Stocks (March 7th, 2014 through March 28th, 2014) |
The average stock on this list is now down -14.21% over the last three weeks and -20.44% from their respective individual highs for the year thus far in 2014.
A major correction in the U.S. stock market is already underway!
Here are four interesting charts for your review (all with key sell signals as triggered by my computer trading program):
1. Biotech ETF Monthly Bar Chart
2. Dow Jones Industrial Average Weekly Bar Chart
3. Dow Jones Transportation Average Weekly Bar Chart
4. Russell 2000 Index Weekly Bar Chart
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