5 Signs All is Not Right With the Markets (+2K Views)

Lorimer Wilson March 28, 2011 Comments Off on 5 Signs All is Not Right With the Markets (+2K Views) 2,792 Views

Prospect of Selling in May and Going Away Starting to Look Good

A number of secondary indicators are showing worrisome negative divergences… indicating that the risk-reward tradeoff [for stocks] is becoming increasingly unfavorable. [As such,] the prospect of selling in May and going away is starting to sound good right now. [Let me explain.] Words: 536

So says Cam Hui (www.humblestudentofthemarkets.blogspot.com) in an article* which Lorimer Wilson, editor of www.munKNEE.com, has further edited ([ ]), abridged (…) and reformatted below for the sake of clarity and brevity to ensure a fast and easy read. (Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.) Hui goes on to say:

With major equity indices approaching an important resistance level…

and the small cap Russell 2000 already in a healthy relative uptrend and breaking out to new highs relative to the market, is it time to sound the all-clear for the bull trade?

Some Caution Flags

Before the bulls uncork the champagne, I would urge caution on a number of fronts.

1. QE2 will end soon: Given the growing slew of positive economic indicators, news that the most recent US Non-Farm Payroll report came in ahead of expectations and China’s PMI rose indicating continuing growth, a growing chorus of Fed governors discussing how the Fed should tighten and discussions of QE2 exit strategies, there will be no QE3 in July. So what happens to the equity markets when the stimulus of QE2, which is designed to buoy asset prices, is removed?

2. Dr. Copper not showing strength: In anticipation of the end of QE2 some of the secondary indicators… are starting to roll over. For instance, despite the continued strength in commodity prices, Dr. Copper is not showing signs of strength as it has broken down from an uptrend and is now showing signs of a minor downtrend.

3. Oil service stocks are weak: Despite the fact that energy has been shown recent leadership, as shown by the relative chart below, but…

the Oil Service stocks, which usually show a high energy beta and should be sprinting ahead in this energy rally, are weak when compared to the Energy sector:

4. The cyclically sensitive semiconductor group is breaking down on a relative basis: If the economic news is pointing up, then why are cyclicals like the semiconductors behaving badly?

5. Financials aren’t behaving terribly well against the market:

Conclusion

While the above secondary indicators showing worrisome negative divergences don’t mean that equities go down right away, they are signs that the risk-reward tradeoff is becoming increasingly unfavorable.

While I am cautious, I am not in bear mode as these conditions can allow these market tensions to resolve themselves through a sideways consoldation pattern. Nevertheless, the prospect of selling in May and going away is starting to sound good right now.

*http://humblestudentofthemarkets.blogspot.com/2011/04/getting-ready-to-sell-in-may.html ( Hui is a director of Qwest Investment Fund Management Ltd and a CFA charterholder.)

Please read https://www.munknee.com/2011/04/counterpoint-equities-are-not-overvalued/ for a different point of view.

Editor’s Note:

The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.

Permission to reprint in whole or in part is gladly granted, provided full credit is given as per paragraph 2 above.

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