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Time to sell in May and go away?

Share markets have had a great start to the year. It has been so good that many investors can’t help but wonder if it is time to take some profits off the table. Will the old adage of “sell in May and go away” ring true this year?

The major indices have given back about 5% from their recent peaks. Bond yields have moved higher. The talking heads who were calling for a crash in stocks and property last year have reappeared to sagely tell us that we were wrong to be making money and that we should be sitting in cash.

The performance of the share market this year is demonstrating to us that global growth and earnings is important. The rally has not been based on falling interest rate expectations, because those expectations have been heading the other way.

My business is known for looking at both stock fundamentals as well as technicals. But we also do a lot of analysis on the macro. One of the best indicators of the global business cycle is the US Institute of Supply Management (ISM) purchasing managers index (PMI). Global stock market returns are highly correlated to the business cycle. As we can see on this chart below, the PMI is heading higher from a trough. This corresponds to the strongest performances on the S&P 500. We don’t want a high PMI that is falling. We want to see a low PMI that is heading back up. This means that we are entering a new multi-year rally in stocks.

Shorter term, we have seen a cooling off in the market. That is natural after such a great run. But this is what I find interesting – most stocks in the Dow Jones and the Russell 3000 have been heading higher in the past few days. That is, recent weakness is mostly due to the large technology stocks. We are not seeing a broad sell-off. I expect markets to consolidate here in the short-term by heading sideways, not by dropping dramatically. This is because I expect there to be a degree of rotation out of technology stocks and into other undervalued areas of the market. Once that is complete, the broad based rally will then follow.

In my 2024 outlook, I was particularly bullish on commodities. These included gold, copper, oil, uranium, and iron ore. With the exception of iron ore, which took a dip but is coming on strong now, the other commodities have done well. Will this continue throughout the year? I believe so, but the great thing about commodity stocks is that they can be traded along the way. For those of you that have been around long enough, you know that you don’t buy and hold BHP for 10 years, you trade the large swings because there will be years when the stock goes nowhere.

My advice is to continue looking for opportunities in resources but take a more medium term approach to these.

We also liked the look of banks in The Dynamic Investor report earlier this year, despite all the negativity. The bank’s report next week will be interesting. I have lightened off on the banks but looking for the next opportunity. Movements in bond yields will also throw up some challenges and opportunities as we move through the rest of this year.

The easy money has been made in the first few months of this year. From here there will be opportunities, but it may be a little harder to come by and you will need to be a bit more nimble.

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