Blog : Penny Stock Week: Sell in May and Go Away?

by Ed Zwirn on May 5th, 2014

The stock market is showing every sign of tumbling once again going into the start of this week, as investors decide whether to "sell in May and go away." This hackneyed market phrase may well prove persuasive to investors in a highly priced market, especially as a relative dearth of economic updates provides traders with the opportunity to cash in and make travel plans for the summer.

Following last week's word that the U.S. Federal Reserve was sticking to its guns and trimming back its quantitative easing program by another $10 billion as expected, center stage is expected once again to be taken up by Federal Reserve Chair Janet Yellen.

Expect her testimony to Congress's Joint Economic Committee and her meeting with the Senate Budget Committee the following day to be peppered by questions about Fed intentions going forward, now that the unemployment rate has descended to 6.3%, below the earlier-set Fed tripwire of 6.5%. As reported previously in this investment blog, Yellen and the Fed have already taken pains to disavow this tripwire and indicate that easy money will continue for some time. She will be given ample opportunity to do so once again, and in the process supply some market-moving quotes.

This follows a week which saw the Dow Jones Industrial Average close Friday at 16,512.89, up 0.9% from the previous week's 16,361.46. The broader market, including smaller and more speculative stocks, participated in this upswing, with the NASDAQ composite gaining 1.2% and the penny stock-rich Russell 2000 small-cap index up 0.5% on the week.

Propelling the market in this direction was a crowded calendar of economic releases confirming evidence of both a winter slowdown and a spring revival, ending with the good news contained in Friday's jobs report.

The consensus had called for the reported addition of 210,000 jobs to the national payroll in April, up from March's 192,000. Instead, the surprise came when it was reported that 288,000 jobs had been added last month, and that February's and March's figures had been upwardly revised by an overall 38,000. The unemployment rate fell to 6.3%. Hourly earnings held flat (as it did in March), while the average workweek as expected held steady at 34.5 hours.

The market traded sideways after this news for two reasons: 1) Anticipation of strong jobs numbers had already been "baked into the pie," and 2) The unemployment rate decline was triggered by the exit of 806,000 people from the workforce, and at least some of those people are likely to reenter soon, given the improved outlook. This puts the odds in favor of the jobs numbers reverting back to trend, and exerts upward pressure on the unemployment rate as the discouraged decide to pound the pavement once more.

Other news last week was also upbeat:

-- Monday brought news of a much better-than-expected 3.4% rise for March pending home sales, up from February's revised 0.5% decline. The consensus had called for a 1% increase.

-- Wednesday's report of a 0.1% Q1 GDP release, on the other hand, proved to be a disappointment. The consensus had called for a 1% increase, a slowdown from the 2.6% growth reported for Q4, in line with the slow pace of growth seen during the period for most economic indicators.

-- Thursday brought news of a higher-than expected 0.5% rise for March personal income, up from February's upwardly revised 0.4% rise. Personal spending outstripped personal spending to rise by a much higher-than-expected 0.9%, following February's upwardly revised 0.5% increase.

-- Later that morning, news came of a lower-than-expected 0.2% rise for March construction spending, while February's earlier reported 0.1% increase was downwardly revised to a 0.2% decrease.

-- Thursday afternoon saw the release of April figures from the auto and truck industries. Auto sales for April came to 5.3 million, down from March's 5.5 million, while truck sales weighed in at 7.5 million, down from 7.6 million.

-- Friday's March factory orders report showed a disappointing 1.1% increase, following February's downwardly revised 1.5% increase.

Looking ahead this week, expect pressure on stocks to continue as the month of May rears its ugly head. The only flowers blooming in the first full trading week of this merry month may well be in your backyard, as the absence of solid economic data, following an overwhelming calendar, creates a void into which fears may leap.

On the other hand, we may just get through things smelling like roses, provided of course that Janet Yellen doesn't commit a slip of the tongue and the international situation doesn't deteriorate even further. In the meantime, I'm thinking about booking a Colorado vacation to add clarity to my outlook, or at least take the pain out of it. They don't call it "medicinal" MJ for nothing.