That’s it for May; What Now For June?

by JDH on May 30, 2009

For the entire month of May I have continued to advance the theory that the current “rally” is about done, and we are due for a significant correct, probably even a crash. On May 2 I said Sell in May and Go Away. Since then the S&P 500 is up 5.3%. On May 9 I said we were in a Sucker’s Rally. The market peaked for the month on May 8 at 929, and the market is down marginally since then, closing the month at 919. So the jury is still out on whether or not my pessimism is warranted.

Last week I showed this chart:

And I said:

From the chart, it’s easy to see a series of lower highs:

  1. October 12, 2007: 1,562
  2. December 7, 2007: 1,504
  3. May 16, 2008: 1,425
  4. October 31, 2008: 968
  5. January 6, 2009: 935
  6. May 8, 2009: 929

Clearly, all is not well with the markets. We have had lots of rallies over the past two years, but each and every rally failed to take out the previous high. The failure after May 8 to surpass the previous 935 level is very bad news. Each successive “lower high” may only be 4 or 5% lower than the previous high (with the exception of the 968 post “crash” high on October 31, which was 32% lower than the previous high), but lower is lower.

On average each successive low after a high is 21% lower, and it takes 77 days to get there. Some are shorter. The drop from the peak on October 31, 2008 at 968 to the valley on November 21, 2008 at 800 was only a 17% drop, and it only took 21 days. The 39% drop ending on October 24, 2008 took 161 days.

If you want to extrapolate the average, from the May 8, 2009 high of 929 we are looking at a 21% drop over 77 days, so we will land at 734 on the S&P 500 on July 24, 2009.

A close at 919 is still below the last “high” on May 8 at 929, so despite this week’s rally, we are still falling. Yes, we may have a bounce on Monday or Tuesday up over 929, but will that mean all is well? I doubt it. Here are some charts, from (yes, apparently Ross Perot has a website, in case you were wondering what he’s been up to these last few years):

The news is not good on unemployment (click the chart for a larger version).

The news on the American federal deficit is even worse. (And for my Canadian readers, the socialist Conservative government, if that isn’t the craziest oxymoron you have ever heard, is projecting a record $50 billion deficit, so so much for fiscal conservatism). Can all of this spending actually be good for the long term health of the economy? I doubt it. The currency will get hammered, and at some point taxes must increase, and inflation will go ballistic.

And, of course, on Monday we get to witness the GM bankruptcy. I believe it was Lee Iacocca who once said “as GM goes, so goes the nation”. Yup, that’s pretty much it.

I said last week that I am 80% in cash, and I am. I’m holding a core position in gold and silver stocks, and they have been on a run recently, so even though I’m in cash I’m still up 5% on the year, which is better than the alternative.

Speaking of gold, is it a buy or sell now? Obviously long term it’s a buy, so if you plan to buy and hold then continuing to accumulate is not a bad idea. Of course I’m the guy who predicted $1,200 gold on March 31, and $1,800 gold on June 30, so it does not appear that I have any clue what I’m talking about. Of course I also predicted 8,000 on the Dow at March 31, and 6,000 on the Dow on June 30. I was close on March 31 (the Dow closed at 7,608), and I may still prove correct at the end of June; we shall see.

My read of the gold chart is that we are approaching significant resistance levels. Obviously $1,000 is significant resistance, a level that has never been decisively broken for an extended period of time. An RSI level of 70 has also proven to be significant resistance, as that’s where the last three tops have occurred. I therefore believe a short term top for gold is near.

So, here’s my prediction for June:

We may continue to rally into the first week or two, but the euphoria since early March is wearing thin, and as volume dries up in the summer, we are headed for a bad summer. If we have an overall market correction, even the gold, silver and uranium stocks will fall, so I am very comfortable at 80% cash. In fact, I may even take more gold profits off the table as we approach the $1,000 level.

As as example, G.TO – Goldcorp Inc. has risen from around $18 in October to $43 today. That’s quite a run, and it can’t continue forever. The RSI is now up to almost 70, and the $5 to $50 level appears to provide significant resistance.

I don’t have huge holdings, but putting in sell orders for some of my holdings at $45 is probably a prudent way to lock in some profits.

Again, if I am correct and a significant correction is coming, I want to have lots of cash to deploy. In hindsight, having cash in October, 2008, and having the guts to invest would have allowed me to buy Goldcorp at $18 and sell it today for $43. That’s the kind of profits we are looking for.

If I’m wrong, and the market continues to rally, I guess I’m sitting on cash and I won’t make any money. So be it. At this point, not losing and protecting capital is far more important than risking everything to buy at an intermediate market top.

That’s my story and I’m sticking to it. Thanks for reading, feel free to post your thoughts on the Buy High Sell Higher Forum, and see you next week.