The Rude Awakening
Wall Street, New York
Tuesday, May 2, 2006

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Sell!
By Eric J. Fry

The month of May has arrived, which means it's time to pay
homage to one of our favorite Wall Street adages: "Sell in
May and go away.'' For more than 50 years, according to the
Stock Trader's Almanac, U.S. stocks have performed poorly
between the beginning of May and the end of October.

We are expecting a repeat performance in 2006.

The next six months will play host to three different
"seasonal" cycles that all bode ill for the stock market.
For starters, stocks generally perform poorly in the May-
to-October period. According to Jeffrey Hirsch, who
publishes the Almanac, the U.S. stock market tends to
produce all of its gains in the six-month period between
November 1 and April 30. Thus, for example, a hypothetical
investor who placed $10,000 in the Dow Jones Industrial
Average at the end of April each year since 1950 and sold
at the end of October would have made no money whatsoever.
But someone who bought at the end of October each year and
sold out at the end of April would have reaped a bounty of
$534,323.

But this year, May-October influence is not the only
bearish seasonal factor at work. The so-called election
cycle also hangs above the market like a guillotine blade.
"Data from S&P shows that in a president's four-year term,
the second and third quarters before mid-term elections are
the weakest periods for stocks," Bloomberg News reports.
"The S&P 500 has fallen 2 percent and 2.2 percent,
respectively [in those quarters], on average since 1945."

A dismal stock market performance prior to this year's mid-
term elections would not be difficult to imagine, given the
plummeting approval ratings of both the president and the
Congress. President Bush's approval rating in a Wall Street
Journal-NBC News poll published last week slipped to 36
percent, his lowest ever. The rating for Congress was even
lower, at 22 percent.

A third "seasonal" factor also suggests that stocks will be
heading lower very soon. "In three of the four instances
since 1970 when a central-bank chairman took the helm,
stocks fell to a bear-market low within eight and a half
months," Bloomberg News reports. "The market's 'Black
Monday' low, reached on Oct. 19, 1987, occurred two months
after Greenspan took over."

Bernanke succeeded Alan Greenspan as Fed chairman on Jan.
31, which means that the stock market should be hitting a
bear market low no later than September 15th. The volatile,
Bernanke-inspired trading action of the last two days shows
very clearly why investors should respect this indicator. A
new kid in town is bound to make a few mistakes...like
sticking his foot so far into his mouth that the Dow drops
a few hundred points.

To be sure, the auspicious confluence of three negative
seasonal factors does not guarantee a selloff in the stock
market, but it does provide ample reason to "sell in May,"
especially when one remembers that the oil price is twice
as high as it was one year ago and the angry rhetoric
between Washington and Tehran is ten times as bellicose.
Furthermore, the first four months of 2006 have already
provided a solid year's worth of returns in various stock
market sectors. The Russell 2000 Index has climbed 13%
year-to-date, while the MSCI Emerging Markets Index is up
nearly 20%, equivalent to annualized returns of 57% and
70%, respectively. Maybe these two indices will be much
higher on October 31st, but the weight of historical
tendencies suggests otherwise.

Buy in May if you must. But why not check out for a while
and hit the road in a Winnebago?

[Eric's Note: Or in a U-haul truck, as our very own Joel
Bowman will be doing very soon. Later this month, Joel and
his colleague, Greg Grillot, will be heading out across the
Lower 48 to see this country up close and personal. Stay
tuned for details as they drive by your neighborhood...

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Did You Notice - Et tu, Unleaded?
By Eric J. Fry

Seasonal factors also bode ill for the energy markets,
especially unleaded gas.

"Summer is almost here, and with it comes the start of
summer driving season," observes Kevin Kerr, the mind
behind the Resource Trader Alert. "All across the nation
consumption of fuel increases in all forms. Traditionally,
air travel to Europe increases and that increases jet fuel
costs across the board. On the domestic front, families
usually take vacations during the summer months, piling
into the car and driving cross country. And outdoor
recreation adds to the demand."

That's why unleaded gasoline tends to hit its high price of
the year in April or May, and then fade into the winter
months. As the nearby chart illustrates, the price of
unleaded gasoline has jumped an average of 20% during the
first four months of every year (between 1990 and 1995).
But then it has fallen an average of about 10% during the
remainder of the year. This distinct seasonal trend
suggests very strongly that unleaded gas might be better
sold than bought at current levels.

This year might be different of course, given the nation's
limited refining capacity and the ongoing switchover from
the gasoline additive, MTBE to ethanol – a change of
formulation that has created additional supply bottlenecks.
Then again, this year might just be the same as usual, if
waning demand for expensive gasoline causes price to slip.
We'll be watching.

[Joel's Note: So too will commodity expert, Kevin Kerr. By
playing the market both up and down, Kevin shows his
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