BUY in May… and Go Away?

DJIA: 42,967

BUY in May… and go away? Like most things, it depends. May was a great month, up more than 5% in the S&P. There are many 5% months, some with follow-through others without. The key here is what led up to May that changes the whole dynamic. Following three consecutive down months, as was the case here, a 5% up month has an extremely high win rate over the following 12 months. Of course, probabilities are not guarantees, and a higher market in 12 months doesn’t rule out a lower market in six months. In other words, it’s no time to be complacent, especially when many seem so. For sure the background is positive, but you can’t forget about the A/Ds and the number of stocks above the 200- and even 50-day averages. In that regard, so far, so good.

We are not fans of the Russell 2000. We have been unkind enough to call it love among the rejects, in the sense companies that grow move on to the grown-up indices.  That said, the Russell has performed not just well of late, but well enough to have some technical significance. Specifically, the components of the index have cycled from less than 10% above their 50-day average to 75%. When above 75%, the index has compounded at an annualized rate of 30%, according to SentimentTrader.com. Last time we mentioned the biotech ETF (XBI -84), which is equal weighted and therefore gives more emphasis to small-cap stocks. There is better behavior here and in other areas in the small-cap universe. Perhaps more important, this offers further evidence of expanding participation, another positive in the overall background.

Timex Tesla? If you recall the former’s commercial – it takes a licking and keeps on ticking. When Musk was busy firing people, we had thought he might better have heeded Walter Reuther’s admonition to Henry Ford, “who do you think buys these cars?” Since its third-quarter results, Tesla’s (TSLA – 319) biggest moves have been related to politics, more specifically Trump. And now two grown men, volatile and egotistical are spatting – Who could have seen that coming? While threats abound, and hence spatting versus arguing, you would think there’s risk to Tesla shares. And recently, the stock did take a hit down to the 50-day. Yet Tesla always seems to find a way — robots, Robo-taxis, its cult status, whatever. Its devotees, like those of Berkshire (BRKB – 490) which have it much easier, don’t scare easily. The overall chart pattern remains up, all the better if it holds those lows around the 50-day. In turn, a move back above 370 would confirm it’s still ticking.

GE Aerospace (GE – 240) has been remarkable. Not only is the stock nearly a double from its April low, but it’s also the way it has done it. The uptrend has been amazingly consistent, dropping below its weighted 21-day average only in the last couple of days. This average typically is for traders rather than investors, as it basically hugs the stock price. While the Air India mishap likely will lead to weakness, stocks don’t go straight up then go straight down. This rendition of the former GE is of course part of the Aerospace/Defense sector, where ETFs, ITA (179) and XAR (199) have the same basic pattern. While this would suggest GE is the driver, it’s only a part of the many good charts. Others include Curtiss Wright (CW – 474), Howmet (HWM – 172), and drone makers like AVAV (190) and KTOS (41). The more conventional defense names like Lockheed (LMT – 469), General Dynamics (GD – 280), and Northrop (NOC – 497) have more neutral patterns.

Perhaps not surprisingly, many charts have the pattern of the S&P and the NASDAQ, which is to say, they are still in consolidation patterns. The textbook says this is a continuation pattern, meaning you might think of them as a rest before a trend continues. In that sense, the market would seem still to have a lot to look forward to as these patterns are successfully resolved. The Software (IGV – 107) and Semiconductor (SMH – 263) ETFs also offer examples here. The latter already seems to have broken out on the back of stocks like ASML (786) and KLAC (875). The recent Oracle (ORCL – 200) news should help the former. Meanwhile, it’s the market that makes the news, and the market seems quite positive. That said, the lackluster response to the CPI number and China tariff news was a bit disappointing. The market’s comeback on Thursday, that was a pleasant surprise.

Frank D. Gretz

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