Sell in May ?

Our Forecast Model has targeted the week of May 3/21 as potential high and near-term turning point for the markets, so we need to be on alert. We have been in a 12-year bull market and things are now at a point where a significant correction is not only possible, but to be expected. At the top of any bull market, we tend to see a number of false tops, before the final real one is in place. So we expect to see quite a bit of volatility through the summer.

The period from May through to October is typically the weakest 6-months of the year.

 Equity markets appear to have got a little ahead of themselves. Wall Street closed lower the last couple of days despite a dovish Fed and outstanding earnings.

A $246 billion boom means stock ETF inflows already beat 2020. Record haul in Q1 helps surpass 2020’s $231 billion.

When this market finally tops, and it could be soon, all investors need to be aware of the massive amount of leverage in the markets right now. Investors had borrowed $814 billion against their portfolios as of late February, according to data from the Financial Industry Regulatory Authority (“FINRA”).

Investors obtain margin debt from their brokerages to buy stocks and other securities. The investor puts up the securities he owns as collateral for the loan. During a bull market, margin debt tends to rise, as the value of securities goes up, investors can borrow more money to buy even more securities.

It all works fine, as long as the markets keep rising. But today, margin debt levels are well above just a normal increase. Take a look at the extreme rise in the past year.

When we see this level of borrowing, we need to be cautious. We saw a similar pattern at the end of the 2000 tech bubble crash, and in 2007 just before the financial crisis.

After a major bull market, like the one we are in, ends, the subsequent decline can be very sharp and nasty. The resulting value loss in securities usually triggers ‘margin calls.’ For those investors who borrowed all this money from their brokerages, the value of their accounts drops with the stock prices, so they then need to add more cash to their accounts. If they don’t have enough money to meet the margin calls, their brokerages can liquidate other positions in their accounts to recapture the loans.

So far, stocks have been rocking higher, so this extra leverage is paying off.  But when the markets top out, it could lead to a powerful decline or crash, as all that margin needs to be paid back.

Looking at the market today, we can see that the S&P 500 has been trading in a tight range for the last two weeks. Our model had forecast a temporary high next week at 4200, so today’s close of 4183 leaves us in that ballpark. Now this top could simply be a period of consolidation where it trades sideways for a while. Or it could be a pull back or a more severe correction.

We do not believe at this time that this is the top for this 12-year bull market, but it could be a turning point, where we see a significant pull back or correction. Understand that this massive bull market WILL end, they all do. Be sure you have a plan in place to protect your wealth in the event of a serious market correction. If you need assistance, our Trend Technical Trader service was originally designed as a hedging service, to actually make money on market declines.

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