U.S. Markets Bounce Back from Initial May Sell-Off

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You saw them – the anticipated May 1 barrage of headlines either promoting, dissenting, or detailing the philosophy “Sell in May.” But U.S. stocks have rallied through six consecutive months – does the theory hold any weight? Initially Wall Street seemed to align with the mantra, as it has for the past three years, with a sell-off on the first day of the month – but the market has sprung right back into the green on surprising economic data.

Jobless claims have fallen to an applauded five-year low, the Labor Department reported that U.S. trade deficit narrowed 11 percent in March, and overseas, the European Central Bank says the bank’s monetary policy will remain accommodative. Adding to the positive sentiment, the 15-year mortgage rate is sitting at 2.56 percent and a recent batch of earnings in the housing sector boasted solid performance.

To be fair, Monday’s swoon was spurred by news that the Federal Reserve is holding to its quantitative easing policy to stimulate spending by buying $85 billion a month in mortgage-backed securities and Treasuries while pointing to fiscal policy as a drag to economic growth. A slow-down in manufacturing activity and retail sales added to the pressure.

Whether it’s a silly cliché or not, the pattern stands in recent years and some analysts contend this old proverb is worth listening to, though investment research firm FundExpert.co.uk attributes the trend to market peaks and dismal macro-economic data, which we’ve had our fair share of in recent weeks: disappointing reports from purchasing managers’ indexes in China and Germany, a dip in U.S. durable goods orders, and worse-than-expected growth figures. Weak sales in corporate earnings just add pack to the punch.

Even small-cap stocks, which normally lead bull runs, are feeling the drag. While the S&P 500 has gained 1.3 percent in the last month, iShares Russell 2000 ETF is down 1.4 percent.

As bulls and bears battle it out, the “Sell in May and go away” theory will be tested by macroeconomic data, not the other way around. On tap for next week’s economic calendar is consumer credit, wholesale inventories and the Federal budget.

“I would definitely lighten up, just keep track of that trend you know, because I promise you as soon as we start to see it’s not heading so much higher people are going to be afraid, everyone wants to sell at the same time,” Alejandro Zambrano, a market analyst at Dailyfx.com told CNBC Wednesday. “I think we’re going to see maybe one or two months more of bad data and then when people are starting to get really gloomy again at that point it’s time to go long again.”

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