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Sell in May, Go Away!
By Mike Conlon | May 5, 2010
“Sell in May, Go Away” is an old Wall St. adage that seems to be proving why it has become a popular investing strategy over the course of time. I can’t think of a time when it has been more prescient; in light of the market sell-offs taking place. Yesterday, world stock markets sold off big time, as did commodities prompting the flight to safety trade and the safe haven dash for the US dollar.
There is a lot of risk and fear in the markets right now, as the Euro zone debt crisis is not inspiring confidence. Notice that this crisis is no longer just about Greece, as contagion appears to be ready to complicate matters in the EU.
In addition, China’s intentional slowing of its economy may be a major drag on world demand, which is not good for growth world-wide. This is having a negative impact on commodity prices, which is generally a positive for businesses and consumers alike, but it is taking down the commodity currencies in the process and causing the unwinding of carry trades as investor rush for the door.
On a positive note, the UK elections will be over tomorrow and that may take one risk element out of the equation.
World stock markets are lower again this morning, as are US stock futures and commodities heading into the market open. At this point there is very little that can be done to change the market mood from risk-aversion, and this could be the sell-off that many doomsday economists have been predicting.
So today is an obvious risk aversion day.
In the forex market:
Aussie (AUD): The Aussie has gotten clobbered over the past few days and is rapid approaching .90 vs. USD. Despite good economic prospects at the moment, a reduction in Chinese demand would hurt the Australian economy the most. Despite the doom and gloom, building approvals came in much higher than expected, showing signs that the Australian economy may be more resilient than the market expects. A government pledge to tax mining companies at 40% isn’t seen as positive for business, however. This is one of Australia’s most profitable sectors.
Loonie (CAD): The loonie is lower as expected as well. The Loonie’s high correlation to oil prices has helped drag it lower, as oil has fallen from above 86 to start the week to 81.5 today. No news out of Canada until this Friday’s employment reports, which if not improved, could give the BOC reason to delay their expected rate hike.
Kiwi (NZD): The Kiwi is also lower, as China is New Zealand second largest market for exports. Tomorrow’s employment reports will show whether or not the economy is improving despite the risk-aversion in the markets.
Euro (EUR): I have never in my life seen a bigger mis-management of a crisis than what is taking place in the EU. Sovereign debt is obviously a major problem world-wide, and the inability of individual countries to debase their currency to help themselves is reflective of MAJOR structural problems with the Euro. When a unified government reacts to a crisis swiftly and with confidence, speculators back off as it is usually a fruitless endeavor to try to bet against a government. When a government fails to inspire confidence, the market smells blood in the water which then makes it much harder to deal with the original problem in the first place. This all comes before the German meeting to decide on the Greek bailout which could send the Euro over a cliff if this thing is not dealt with properly and with confidence. Much, much more to come. The Euro is at 1.28 and change and falling like a rock.
Pound (GBP): The Pound is actually showing some life and is positive against all but USD and Yen as risk themes are too much to overcome. The most recent polls suggest that the Conservative Party will be the victor in tomorrow’s elections and that they will be able to put together a coalition government which will avoid the dreaded “hung Parliament”. The Conservative Party has vowed to reduce the deficit more than the other two parties, and this could be a sign of the new paradigm taking place world-wide. Reckless spending has to be reigned in, and I hope that our idiots in Washington DC take note if indeed the Conservatives win.
Dollar (USD): The Dollar is higher on the flight to safety trade, and pending home sales were higher yesterday showing signs that the economy is recovering. What is Europe’s loss may be the US’s gain, as the Dollar is known as the “anti-dollar”.
Yen (JPY): Japan is still closed for the Golden Week holiday, but that hasn’t stopped Yen appreciation as carry trades are being unwound at breakneck speed. They could be in for a very rude awaking when their stock market reopens, especially if the EU doesn’t combat its debt crisis in a meaningful way.
Wow. All I can say is wow. Right now, the confluence of events taking place in the world is adding up to the perfect storm. There is virtually no leadership in politics anymore, and this couldn’t be more true than what’s happening in Europe.
I would not be surprised at all to see a break-up of the Euro going forward. The structural flaws are too many, and populist revolts are preventing politicians from showing some spine. Riots in Greece are typical and not unexpected, and already the streets are being filled with tear gas.
It’s ugly out there. Very ugly. I’m not certain what the EU can do now to prevent a death spiral. The inability to act may have damaged the Euro irreparably.
If you are still in stocks, I’d advise you to use serious risk management, including protective stops.
And if you’re not in the forex market yet, I implore you to get involved. Buying the Dollar could hedge your other investments against potential catastrophic losses.
To learn more about how you can take advantage of world events through the currency market, be sure to check out our currency trading courses!
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Topics: What To Look At In The Market |
May 6th, 2010 at 3:02 am
What do you think will happen to GBP today? Could hung parlaiment in the UK general election push GBP against USD.
May 7th, 2010 at 5:19 am
I agree with all that you have discussed in your article. There are many things that will influence the way forward, especially as the Tories have won the election and they are here to stay for the next five years. it will be interesting to see how the financial markets react to any big changes they may make after 13 years of Labour