Sell in May and go away – Except in year with an Election day!

Has sentiment turned? – Is Risk-off off? And is Risk-on on? - These are some of the question people are asking after some fraught and fractious weeks in the markets. However some semblance of normality seems to be returning to markets. - It may be perhaps still too early to say whether this is the start of another rally, or merely a correction in a new downtrend, however, isn’t that always the case: Last October and last November felt the same, as did September 2010.   

Whilst my longer-term outlook remains rather miserably bearish, I believe there is a fair chance we may have a decent summer rally. – Part of my belief for this goes back to an article I wrote about earlier this year, which alluded to a comment from Bank of America Merrill Lynch analyst Stephen Suttmeier, who pointed out that 'On average, the April-May period is the weakest two-month period for the Presidential election year and this is followed by the strongest three-month period in June-August. I include a couple of charts from Barry Ritholz's Big Picture blog which highlight this (Here is the link to the article). 

 

The performance of the past few weeks does little to dispel this theory on under-performance in April and May in elections years, April this year saw a small drop of just under 1%, May saw a decline of over 6%, whilst so far June is up over 3.5%. – The strong bounce by equity markets over the past few weeks has been helped by the Spain bailout, the Greek vote, and a host of small steps by various governments and monetary authorities. Amongst these we can include BRIC nations pledging money to the IMF war-chest, UK government pledging money to its banks, Scandinavian countries relaxing pension fund rules, easing the burden on domestic yield curves. - Given all this backdrop, talk of further Fed and ECB action do not seem that far-fetched. - All this action could set the backdrop for a decent summer rally, possibly back to or close to the highs of earlier this year. 

The technical picture also supports the possibility of further gains. The chart below shows the Daily S+P500 with a clear inverted Head and Shoulders pattern, though the very sharp rebound, having hit 61.8% correction may be slightly overdone for now. Worth noting the similiarity between this pattern and the larger inverted H&S pattern from 2008/09 - (See Lower Chart).

Chart below is 2008/2009 Base. 

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