Hey 5-Star Trader,
May is seasonally a weak month for the market and the media likes to blame different things for its poor performance. Lately, they’ve named the fear of inflation as the latest culprit.
Yes, there are some legitimate fears of inflation, especially with the excess money printing thanks to several stimulus checks, but there are more factors in play.
Seasonality explained…
Earlier this month we saw the market rally so high into earnings that it became overextended. Whenever this happens, the market always corrects itself by trading lower. In fact, this boom-then-bust behavior is typical to see around this time during earnings season.
The indexes, particularly the Nasdaq, tend to rally into major tech earnings. Which we saw happen this quarter. But, because it was up on new highs going into earnings, it simply had to come back down and find support. This move to the downside is what I refer to as the “FAANGover.” This, coinciding with historical May weakness has created a lethal combination to where the move downward was exacerbated. Wall Street axioms are saying “sell in May and go away” and this is continually repeated because it works to change the market.
It partly works because it’s a self-fulfilling prophecy. When traders think it’ll come through, they stop buying (or start selling) in anticipation of a weak month. Right now, I would say it’s coming through right on schedule.
May means discounts…
While I’m not convinced this pullback started because of inflationary fears, of course there are inflationary fears! The government has been printing money hand-over-fist and has significant plans to print even more. The cost of services and goods has gone up and money has poured into cryptocurrency. Everyone knows inflation is here and the Federal Reserve Board (Fed) keeps trying to prove to us they are managing it. But regardless of what the Fed does, it’s going to be hard to stop this train that is already barrelling out of the station — at least through this weak month.
Smart money knows inflation is here, and yes, the market will get scared about it. We know this, and we’ve known it for a while, so there is no reason to sell stocks because of “inflationary fears.” Let’s see how May shakes out, and most importantly, look for solid stocks to buy at a discount. May is a great month to add long stock positions.
