Sell in May?

Hey 5-Star Trader,

We’ve made it through a variety of landmines, including most large-cap technology leaders reporting earnings. I went into FAANG earnings week bearish, as I felt that the move lower in Tesla (TSLA) post-report was a bad omen for the rest of the market. My hypothesis was that there were so many macro headlines weighing on the market, including the rising 10-year, the Federal Reserve hiking rates, halting asset purchases, the ongoing war in Ukraine and the resulting supply chain snarls it has further created. Of course, you also have an economy that was recovering from its own supply chain snarls due to the pandemic, record money printing, and government assistance that has all played its part in record-high inflation. 

At this juncture, we have made it through many, core earnings reports. There were many who hypothesized (or hoped) that technology earnings would ‘save the Nasdaq.’ This definitely was not the case, as the Nasdaq ended April as the most destructive month for the index since October of 2008. It closed out on the lows, and on the first day of May, has proceeded to fall even further.

So, what is next?

In these instances, I always like to look for relative strength and weakness. The Phoenix Finder Turbo is the most helpful in doing this quickly. 

Here is a screenshot of the SPDR S&P 500 ETF (SPY) below, along with key indexes and sectors displayed on the Phoenix Grid.

Please click on the image to enlarge

Usually, when the market falls, I will at least see 1-3 areas of the market that are holding up, as money rotates into areas of safety. However, at this juncture, even the strong, relative strength areas of the market are selling off. That means that not only is there not really an area to rotate into but also that money is coming out everywhere – which means it’s a total risk-off environment. It’s a major signal of panic and fear.

With the VIX incredibly high, up above 35, and the 10-year making a high on the year of $30.02, there still remains quite a bit of reasons to be suspicious as it relates to the upside of the market. 

All of that being said, there is something that could potentially send us higher – the high put/call ratio, plus a major catalyst this week, which is the FOMC meeting on Wednesday, May 4th. What does this mean? 

Well, the market largely expects that the Fed is going to raise rates by .50. That means, that it is possible that the news could be priced in. That also means that it’s possible that if the Fed doesn’t release any more bad news, we could see a relief rally, and short squeeze, post-Fed. 

Now, we are down on the lows of the year, and there really hasn’t been any kind of buying or excitement. Could there be another catalyst we aren’t seeing? Of course, it’s always possible. The unknown catalysts are usually the ones that cause the biggest moves. 

So, how am I trading it? I am hedged in my long-term accounts, but I have lightened up substantially on the shorts. I’ll be watching earnings this week, but I don’t think any of these reports will be able to save the market. Right now, I’m mainly sitting in cash, locked and loaded and ready to go, because while I have a bearish mindset right now, I would love to trade a short squeeze higher. I also plan on adding more long stocks to my long-term account. I just don’t think it’s quite time, yet!

-Danielle =)

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