|Sell in May and go away|
I am sure that you have experienced a time when your company grew nonstop. The feeling among your team was that momentum would carry sales higher, but instead sales dropped. Why? It was simply that all possible buyers of your products made purchases during the momentum buildup until there was no one else to buy. In market terms this is referred to as a lack of marginal buyers. With not one additional willing buyer, sales abruptly stop and momentum turns negative instead.
As I saw the futures go negative in real time during Bernanke's speech yesterday, it looked as if marginal buyers were pushing for the last time. An absence of sellers gave the last buyers the chance to quickly drive prices very high. Then a flood of new sellers came in; overwhelming buyers. At the end of the day, the large reversal and the massive volume confirmed suspicions that the market was ready to exit risk.
It is important to understand that US equities have been rising due to a lack of good alternatives. It is not abnormal for money managers to drink their own Kool-Aid and wax poetic about the great logic behind their purchases of ballooning assets. I saw this exact same phenomenon during the last recession. Despite seeing construction spending collapse after April, 2006, buyers of real estate assets continued to binge for over a year more.
We now need to keep an eye on the end of the month. If the S&P 500 ends the month around 1,600 or lower, be ready for the fall to continue.
As long as our political leaders continue to promote ideas of wealth confiscation, or as Obama calls it wealth redistribution, market risk will not change. Businesses everywhere will continue to refuse to make long term investments.
If we want to see a better economic future, a new era when markets reflect real values and not distortions created by governments, we need to stop allowing our leaders to continue to make business the bad guy of the movie.