Stocks have been seriously beat up by the COVID-19 crisis because most of the American economy is based on consumption, and when people stop consuming, money is not made and the economy suffers. Now according to a report from Business Insider, stock markets may take another major hit with a possible massive sell off in May.
Despite a deluge of atrocious economic data, the S&P 500 posted its best monthly increase since 1987, leaving many market participants scratching their heads in disbelief. But not all think the latest push upward has staying power.
Masanari Takada, a macro and quantitative strategist at Nomura, says trend-following strategies — commonly known as CTAs — are propping up the market in unsustainable fashion. And he sees a reckoning on the horizon as Nasdaq 100 futures linger above a key technical threshold.
“We think a key concern here is whether the Nasdaq 100 manages to hold the trigger line that we believe exists at around 8,180,” Takada said. “It appears that CTAs have put a stop to their accumulation of long positions in Nasdaq 100 futures.”
For reference, the Nasdaq traded around 8,700 on Friday, meaning it’s stayed above Nomura’s key technical threshold by a large margin. The chart below shows, however, that CTAs have put a hold on bullish positions in Nasdaq futures, suggesting the run may soon be over.
Takada ultimately thinks buying power may start to dwindle in the near future as much of the equity appreciation in April was attributed to these CTAs and trend-followers — which now represent a weak hand in the market.
“In terms of technical patterns, we think that CTAs may take another stab at chasing the market up starting around April 29, provided that the index stays above this line,” he said. That’s a situation that’s since transpired.
Takada continued: “However, if such an upside attempt were to fail to squeeze some investors out of shorts or convince others to stake out fresh longs, we would expect the buying pressure generated by these CTAs on their own in the US equity market to fizzle out on or around May 8.
“This would imply a need to brace for selling in tune with the ‘sell in May’ adage.” (source)
Will there be a sell off in may? It is possible. One can only guess what will happen at this point.
The biggest trend that one can bring away from this is that now is a pretty bad time to get involved in stocks because the markets are very very unstable. If anything, it is a time to move towards security in the form of hard assets such as tangible things, not investing in companies whose success or failure because of the ensuing bailouts are now elected by bureaucracy at the halls of the Federal Reserve Bank.