What happens if the pros run away?

Founder and Publisher of the Switzer Report
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A 208-point dumping of stocks on Friday by fund managers and other smarties raises the question – the wise guys have now sold on the last day in May, so are the professionals now going to run away?

QE headache

In May last year, ,the best indicator of Wall Street – the S&P 500 index – saw a real ‘sell and run event’ with this broad stock indicator down 6.3%.

While the US index might have lost 1.43% on Friday to finish at 1,630.74, it was still 2.08% higher for the month and is up 14.34% for the year so far. That’s still a big effort. A sell off or pullback is overdue on Wall Street and you can blame the Fed sticking solidly to QE3 – quantitative easing – for that.

Right now, there is an anxiety battle going on for investors, where good economic news in the USA will mean QE tapers and then ends sooner, rather than later. And despite this ultimately being driven by good economic news, it will mean the market will have the uncertainty of going it alone, without the support of the Fed’s $85 billion worth of bond-buying that has kept interest rates down, helped the housing recovery and rejuvenated the US consumer. Remember, the US economy gets 70% of its growth from the Yankee consumer, who incessantly shops and seldom drops, except when a GFC comes along.

So good news this week – the jobs report is out on Friday – could it make this 208-point drop look like a “sell in May and go away” situation? I doubt it.

Watch Wall Street

I know this all sounds weird but stay with me. The experts all argue that Wall Street’s sell-off on Friday was because fund managers and other professional market players took profits to square up their books for the end of the month.

I reckon this week will be a bit patchy, until the job numbers arrive, and it will be interesting to see how Wall Street reacts. If the number is great, there could be an “end-of-QE” sell-off. If there is an OK number, stocks could rise on “the recovery is working but QE won’t end soon” market assessment. If the number is weak, there could be a “QE is not working” sell-off. By the way, June is a generally crappy month, with the long-run average showing a 0.1% drop, so we could be in for a bit of volatility.

The home front

Over here, we’re down 5.1% in May on rate cuts, a bad Budget, a dropping dollar, Japanese concerns and a slowing economy. Mind you, the dollar’s drop will be great for stocks down the track but the question is – can it go lower?

I suspect so, but there could be a turnaround after the US jobs data, or else another leg down for stocks. That’s the big challenge for us this week. I’m going to wait to see the job figures and then determine when I buy in again. I’d rather miss a percent or two if the market turns around on good US news, than gamble by buying ahead of the data.

Of course, if Wall Street reacts badly to the jobs report, we will go lower and that will mean a better buying opportunity. My overall positive attitude to stocks remains and as I said last week, my biggest concern is that I time my re-entry as close to perfection as possible.

In closing, the Yanks got a slightly softer consumer spending number, consumer sentiment shot up from 76.4 to 84.5 over April to May and the Chicago ISM manufacturing indicator showed business expansion was on the rise.

The week ahead in the USA is a big one for data, but Friday is the biggie, and I’ll be watching the pros and how they’re running when that jobs report comes out.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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