Can it happen again? Sure it could, but the chances that it would happen in the manner it happened have been reduced. Here's why.» Read More
Sell in May and go away? It's a little more complicated than that.
We asked our partners at Kensho to look at the last 20 years of May to October trading, as well as November to April.
From the May to October period, the S&P 500 was positive 65 percent of the time, or 13 of 20 occurrences, for an average return of 1.4 percent.
For the November to April period, the S&P 500 was up 85 percent of the time, or 17 of 20 occurrences, for an average return of 7.1 percent.
Bottom line: The S&P 500 was up more often from November to April, and with better average return, than the period from May to October.
There is something to the idea that May to October underperforms November to April.
Does that mean you should pull your money out on May 1 and put it into bonds for six months? Reasonable people can differ, but I would certainly advise against it. If you have an allocation of, say 60 percent to stocks, than you should stick with that.
And I would certainly advise against buying bonds in this environment, with the very real possibility of a drop in prices as we move closer to a Fed rate hike.
Disclosure: NBCUniversal, parent of CNBC, is a minority investor in Kensho.
A poor end to the month as key "long" trades unwind a bit.
Remember the three trades that have been the biggest winners this year:
1) long the dollar
2) long Germany
3) long Healthcare, particularly biotech.
These are what traders call "crowded longs," that is, a lot of traders have bought into these trades and are sitting on a lot of profits.
All three of those trades have come unwound a bit this week.
What happened? First, weak economic data in the U.S. has caused the dollar to weaken—the Dollar Index is down nearly 4 percent just this week.
That's one "long" trade that's not working.
As the dollar has weakened, the euro has strengthened. That's bad news for the German stock market, down more than 4 percent this week, because a stronger euro makes that country's exports more expensive.
That's a second "long" trade that isn't working.
Finally, some recent disappointments in earnings from several biotech companies, including leader Biogen, has caused a pullback in that space, with Biogen down almost 12 percent this week alone.
That's strike three: none of these three long trades are working any more.
As traders "lighten up" and pull money out of their winning trades to preserve profits, this is having an effect on other sub-sectors that were doing well.
For example, airlines were trading near the high end of their range recently, but are down almost 5 percent this week. Retail stocks were market leaders, but this week the group is down 4 percent. Same with home builders—market leaders coming into April, but down 8 percent for the month, 5 percent this week.
What to do? Maintain perspective. Today's economic data indicated the jobs market—and wages—are continuing to improve.
As for stocks, it's true some of the best performing sectors have had a tough week, but all remain up for the year. And the S&P 500—the benchmark, is only 1.6 percent from its historic closing high.
When was that? Why, it was last Friday. Seems like a long time ago, no?
I said Wednesday the chances of a Fed rate hike in June were extremely small, and I still believe that. But the very low initial claims report for this week (262,000 vs. 290,000 expected) may be a sign that March's low nonfarm payroll report will be revised upward—which is certainly a requirement for the Fed to even consider a hike.
The Employment Cost Index, which measures the cost of labor for businesses, was up 0.7 percent quarter over quarter, better than an expected 0.6 percent increase. It rose 2.6 percent year-over-year, another sign of modest wage pressures. The dollar strengthened, and the 10-year Treasury yields rose on the news.
1) Energy has turned from loser to winner, while healthcare is flat. Energy, which was the loser for the year going into April, has turned into one of the gainers as oil went from $48 to $59 a barrel. Healthcare was the big gainer going into April, but a volatile month for biotech combined with some real down moves in other sectors. The iShares Nasdaq Biotechnology ETF is flat.
Sectors in April
Indeed it's not biotech that investors should be looking at; the bloom is off the rose for many sub-sectors of healthcare, including pharmacy benefits managers like CVS Health (down 2.3 percent for the month), HMOs like Health Net (down 11 percent), managed Medicaid providers like Molina (down 11 percent), and device makers like Medtronic (down 2.9 percent)
Much of this seems to be simple de-risking toward the end of the month. Healthcare as a group was the big winner this year and was a very long trade.
Rate hike in June? Forget about it.
I know, removing the statement that there would not be a rate hike in the next meeting theoretically still holds out the possibility there could be a hike in June.
But read the statement: this seems like a very small chance.
The Fed has told us when they will raise rates: 1) when it has seen further improvement in the labor market; and 2) when it is reasonably confident that inflation will move back to its 2 percent objective in the medium term.
In the statement, the Fed said that:
1) job gains have "moderated," economic growth "slowed," with growth in household spending declining and business' fixed investment softening, and repeated the housing recovery remains "slow;"
2) inflation is anticipated to remain low (below its 2 percent objective) for the near term.
In other words, the Fed has offered a fairly dovish (cautious) view of the economy, and inflation is also below its targets.
That sounds like a June rate hike is off the table.
Is there anything that could change this? We would have to have some bullish—and I mean really bullish—economic reports by now and the June 17 Fed meeting.
Specifically, April and May nonfarm payrolls would have to be up—big time. And March, which was a disappointment at 126,000, would have to be revised upward significantly.
We'd also likely need to see evidence that the rest of the economy is rebounding...that GDP is closer to, say, at least 2 to 2.5 percent rather than the 0.2 percent in the first quarter.
Finally, we'd need some darn fast moves up in the inflation indicators.
Doesn't this all seem a bit unlikely? I mean, I know the Fed loves to use the word "transitory factors" but betting on a June hike seems to be stretching credulity.
A strange morning of trading, with the German stock market down big (about 3 percent), German bunds rallying big, euro rallying big, oil rallying big.
The simple way to understand this is to know where the market is. In general, market participants are:
1) Long the dollar
2) Long Germany
The really weak economic numbers—particularly the disappointing GDP—implies those two trades could be coming a bit unwound:
Weak GDP = Fed is slower to raise = weaker dollar/higher euro = foreign exchange headwind for German exports = bad for German stock market.
The implication for stocks is that other long plays could be under pressure. What is the biggest gainer this year? Healthcare, in particular, biotech.
But biotech has been volatile. We have seen significant gains in other healthcare sectors this year, and that too is coming under some pressure. In the U.S. markets, we have a new route going on in healthcare, but not just biotech: Medical equipment makers like Stryker, labs like LabCorp, hospitals like Tenet, and HMOs like Cigna are all down 2-4 percent.
Of course, this doesn't explain everything. We also had a huge runup in German bund yields, up 12 basis points to yield 0.28 percent. The rally in yields began at the open in Europe and continued through the close. Traders blamed some of this on Jeff Gundlach's comments that he might make an amplified bet against German bunds. A German auction of five-year notes also did not go well.
What we need now is the Fed to put it all in perspective.
S&P futures were weaker ahead of the first quarter GDP report, dropped about 4 points immediately after and then bounced. That's a fairly modest response.
Bulls argue that a weak first quarter GDP—which showed the economy grew at just 0.2 percent—was well-telegraphed and that the question is to what extent we'll get a bounce back in the second quarter.
Peter Boockvar, chief market analyst at the Lindsey Group, this morning noted that hopes for 2 percent-type growth for the full year was still alive, but 3 percent was now highly unlikely.
What does this mean for the Fed meeting that concludes Wednesday? My bet is the members will recognize the weakness of the economy, but will say that many of the forces responsible for the poor showing—weather, low oil—will likely be "transitory."
The third factor, a strong dollar, may also be transitory if we continue to get these lousy numbers.
But the entire healthcare complex is weak Monday: medical equipment companies like Stryker, hospitals like Tenent , HMOs like Healthnet or drug distributors like Cardinal Health are all down 1.5 to 3 percent.
This isn't too hard to figure out: biotech is the highest profile subsector of healthcare. Healthcare is the best performing sector of the S&P 500 this year (up over 7 seven percent), so the consensus among traders is there's a bit of "sell the leader."
Which brings me to why Biotech is so weak Monday. The main issue is that this is the biggest leveraged long play on the Street.
With that understanding, I see several issues:
1) God help you if you disappoint. Did you see Celadon Monday, a smaller biotech that is down 80 PERCENT on the failure of its gene-therapy drug Mydicar for heart failure? Or Aerie Pharmaceuticals , which is down more than 60 percent in the last two trading sessions after announcing that its lead product, a treatment to lower eye pressure in glaucoma patients, had failed to meet its objectives in a late-stage trial. Biogen also had disappointing earnings at the end of last week.
2) Mylan rejecting the Teva offer is certainly taking some of the takeover premium out of the healthcare sector, but I think another soured deal is just as important: Applied Materials announcing it was calling off its merger deal with Tokyo Electron, due to problems with the U.S. Department of Justice.
This was an even bigger surprise than Mylan. There were a lot of traders long AMAT.
My point is this: killing both of these deals is causing de-risking in other sectors and stocks where there are "consensus longs."
Finally, the big-cap S&P 500 has joined the small cap Russell 2000 in record-closing territory. This is a great relief to everyone who worried that the market could not possibly advance once the Fed stopped its quantitative easing program, and certainly not within a few months of the Fed raising rates, which certainly seems like a strong possibility.
With the Federal Open Market Committee meeting this week, the big issue is, how will the central bank characterize the economy? Will the Fed statement be enough to get us decisively out of the trading range we have been in?
The economic data has certainly been choppy, with first quarter GDP now expected to grow a measly 1 percent.
However, I think there is a good chance the Fed will say the three factors that have been moving markets—weather, weak oil and a strong dollar—are all likely temporary, and are now reversing.
That may increase the chances of a September rate hike (I think likely) but it will also take some pressure off the recent worry about earnings.
Indeed, they are reversing: West Texas Intermediate crude oil is near its high for the year, while the dollar's rise has stopped and even declined since peaking in mid-March.
The strong dollar in particular has been a mess for multinational companies. Just look at the difference in earnings between the big-cap S&P 500—where many companies get more than half of their revenues overseas—and the small-cap S&P 600, where most get little if any revenues overseas:
S&P 500: down 3.4 percent
S&P 600: up 5 percent
We are talking about a difference of more than 8 percentage points!
Competition in stock exchanges coming.
It's been known for some time that dark pool IEX, which was prominently featured in Michael Lewis' "Flash Boys" book, aims to become a stock exchange later this year. It will be known as Investors' Exchange.
Late last night Patrick Healy announced that he would be joining IEX. Healy ran Issuer Advisory Group, which advised companies on where they should be listing and also acted as a general advocate for those companies.
Healy didn't say what he will be doing, but it's pretty clear that Investors' Exchange is bringing in Healy to get new listings for the nascent exchange.
Despite the weak equities business, NYSE/ICE still gets a significant portion of its revenues from listings (about 12 percent), so this is a sign that Investors' Exchange is going to be going after the listings business of both NYSE and Nasdaq.
Separately, BATS Global Markets, the third exchange, this week hired Laura Morrison, who until last week was the NYSE's head of ETFs.
New BATS CEO Chris Concannon has made no secret that he wants to beef up his ETF trading business (several ETFs already list on BATS), and this is a sign he is very serious about increasing the already substantial trading of ETFs on BATS.
Competition is alive and well in the equity space!
Still, you can't help but notice the continuing impact of the strong dollar on revenues. Here's Amazon and Google's revenues, then reported in constant dollars:
These are huge differences, 7 percent in the case with Amazon. With Amazon, you're dealing with $22 billion in sales for the quarter. Google reported revenue of $14 billion.
Starbucks, which reported an amazing 18-percent increase in revenues, noted that its EMEA (Europe, Middle East, and Africa) segment reported net revenues down 10 percent, largely due to "unfavorable foreign currency translation."
The Pimco Total Return Fund, launched by Bill Gross, has lost its title as the world's biggest bond mutual fund, following two years of withdrawals.
Shares in global bank rise on Q1 results just days after its annual general meeting, at which it said that it was considering moving from London.
The Swiss banking giant reported a hike in profit for its first quarter, despite the SNB's shock decision to unpeg its currency from the euro.