Thursday, May 17, 2012

Market Rebound Likely

Along with my recent suggestion to hold more cash than normal, I cited (on 4/18) the strong historical evidence to support a strategy of "Sell in May and Go Away."  The tendency of poor returns from the stock market from late spring to mid autumn might be skewed this year by another historical pattern, the presidential election cycle.  In years of presidential elections in the U.S. since 1900, there has tended to be a market correction in April and May, followed by a rally up to the election.

The 7% drop in the S & P 500 Index this month is consistent with the presidential cycle.  The stock market now seems oversold on a technical basis, and market sentiment measures have fallen sharply.  These two factors make it likely in my opinion that a rebound in stock prices is imminent, at least an oversold bounce.

This may not be a normal election cycle, however, as another political standoff over the U.S. budget and taxes looms by year end.  There could well be a significant increase in taxes and sharp spending cuts that would be a substantial drag on economic activity next year.

But for now, I suggest using some cash reserves--or even selling government or investment-grade corporate bonds--to add to stocks.

Steve Lehman

S & P 500:  1305

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