Is It Too Late To Sell In May?

• World Stock ETF falls to important support.
• Key bond confidence indicator at a key level.
• Dollar offering stronger signals that the correction is over.

Global Stocks

A couple of weeks ago I drew your attention to the $61 area on the MSCI World Stock ETF, the ACWI, as I felt it was a critical one, the violation of which would signal a more generalized equity market decline. At the time the price was moving away from that magic $61 level but, given Monday’s action, it now appears to be dragging itself back.

In the meantime some of the indicators which were looking reasonably positive at the time have started to come under some minor pressure, suggesting this time we might not be so lucky. By the same token Chart 1 taken from a Google Trends “Sell in May”  search suggests that from a contrary opinion point of view, we would be better off to add to existing positions in these few remaining days of May. The chart represents the number of news headlines that talk about Sell in May. It’s also important to note that Thursday begins a five day period of the bullish end-of-the-month seasonal. Bearing all that in mind, let’s take a look at the technical evidence.

Chart 1

Chart 2 shows the daily closing action of the ACWI over the last couple of years. We see a nice breakout above the neckline of a consolidation pattern or an inverse head and shoulders formation. In recent days though, the price has failed to move ahead thereby re-confirming the breakout and may, and I really want to emphasize the may, be forming a small broadening formation above the green line with a flat bottom. This pattern is highlighted with the two diverging brown trend lines. It only becomes a legitimate bearish factor if the price falls directly below the lower brown line at $61.50. A bounce from the line with a subsequent penetration would complete a head and shoulders, a bearish pattern but not as powerful as the broadening variety. Alternatively, a failure to break to the downside would be quite bullish, probably setting the scene for significant new highs.

Chart 2

Chart 3 shows one indicator that suggests a downside break of some kind is going to take place and that is my Global Diffusion series (!PRDIFGLO) in the lower window. This one has just gone bearish and remains in a very overbought state, a condition that clearly suggests downside pressure.

Chart 3

Chart 4 changes the presentation of ACWI to a bar chart. Note that Monday’s close was right at the intermediate up trend line. It’s true that the line experienced some false downside breaks in the last few months. However, the bearish signal just triggered by the short-term KST shows that unless prices can quickly rally through the bullish seasonal, they will be quite vulnerable. If not, this negative momentum is likely to be sufficiently strong to result in a downside penetration.

Chart 4

US Equities

Chart 5 compares the NYSE Composite ($NYA) to two McClellan Volume Oscillator EMA’s (!VMCOSINYC). When the (black) 10-day series crosses above its (red) 20-day EMA a buy signal is triggered and vice versa. As you can see the NYSE is at a very critical point. Monday’s action pushed it below the green breakout trend line in the top panel, down toward the (red) intermediate up trend line. Not much margin for error here! Note that the two EMA’s for the volume oscillator are very close to each other in a very finely balanced situation. Also, they are close to the equilibrium level at a time when the Index was at a new high or close to it. Weak momentum at a new high, when confirmed by the price, is often followed by an above average decline. In this case confirmation would come with a decisive break below the red up trend line.

Chart 5

The relationship between high yield and highest quality bonds (HYG:TLT) usually moves in tandem with equity prices as bond market confidence ebbs and flows with that of the equity market. One measure of such confidence is featured in Chart 6. It compares the iBoxx High Yield ETF to the price of the Barclays 20-year Trust, the HYG to the TLT. The two red dashed arrows show that the ratio has not confirmed a new high in the S&P for some time as the market has been moving higher and the confidence series lower. Recently the ratio had been sporting a nice rally, but in the last few days it has reversed again to the downside.  As a result the recent breakout above the green down trend line has turned out to be false. Now the ratio has moved back to support in the form of the inverse head and shoulders neckline. If it is penetrated that will offer a further indication of exhaustion on the part of the ratio and therefore the level of confidence. The chart also indicates that the KST, in the bottom window, is very overextended and has started to decline. That strongly suggests that the ratio will drop into the body of the head and shoulders, which could well mean that the April/May rally was actually a counter trend bear market advance, not a good sign for equities should it happen.

Chart 6

US Dollar ($USD)

Last week I held out the possibility that the Dollar Index ($USD) correction was over. Since then the Index has firmed up, thereby offering us more evidence in this direction. For example Chart 7 shows several relationships and markets that are dollar sensitive. When a consensus of these series point up it adds weight to the view that the Index is also in a bullish mode and vice versa. Since last week the ratio between US and international equities (SPY/EFA) has broken more decisively to the upside. Also the inverted DB Commodity ETF, the DBC has violated its down trend line. The relationship between US bonds (TLT) versus international bonds (BWX) has been moving up sharply in the last few days, but has yet to violate its down trend line. The Index itself is also below its down trend line but given the recent buy signal from the KST in Chart 8 will likely do so after recent gains have been digested.

Chart 7

Chart 8

One reason for expecting this comes from the fact that the Japanese Yen ($XJY) in Chart 9has now broken decisively below its recent trading range and the Canadian dollar ($XDC) in Chart 10 has now confirmed that the recent advance was a false breakout. That was not the case last week.

Chart 9

Chart 10

Arguably more important is the fact that the Euro ($XEU) experienced a false upside breakout which took the form of a head and shoulders top. With the KST now in a sell mode again can new lows for the euro be far off?

Chart 11

Good luck and good charting,
Martin Pring

The views expressed in this article are those of the author and do not necessarily reflect the position or opinion of Pring Turner Capital Group or its affiliates.