Bull Markets Don’t Go Up In A Straight Line… Watch the ASX 200

"Sell in May and go away," is one of the many folksy sayings you hear in the financial world to explain the cyclical movement of the market. It's sort of like an old wive's tale, something that's lingered around as anecdotal wisdom because there is a kernel of truth in it. Historically, the numbers show that the market tends to do its hard yards between Halloween and May Day, and then kick up its heels in the intervening months.

Why exactly this would be the case has never been made clear. Is there no news affecting stock prices between May and October? Are most of the world's actively traded stocks traded north of the equator, giving global cycles a seasonal bias towards the North American summer? Or do people just get tired of trading six months of the year and turn their brains off? We don't honestly know. Nobody does. It's a set of facts which has no theory attached to it, other than a memorable expression.

But with markets in the U.S. and Australia chugging ahead into record territory, it might be time to consider the old expression and update it for the times we live in. Maybe all this global warming has the planet confused, and the seasons are coming on even sooner. Maybe today is May, even though the calendar says 26th February. Maybe Al Gore is right! This would be both an inconvenient and potentially useful truth.

"The U.S. market has now gone nearly six months without so much as a 2 per cent correction and expectations that a five to ten per cent parabolic tumble is just around the corner are growing," reports David Nason in today's Australian. "Bull markets don't go up in a straight line," is another axiomatic Wall Street truth. It eases nerves during those periodic corrections that must take place before the stock market goes to infinity. But here's the real question: if the Dow 'corrects' five or ten percent from here, so what? Will it have the slightest impact on Australian resource shares, or the ASX 200?

The ASX 200, you may recall, began the year with a nearly three percent correction in the first two trading weeks of the year. Since then, the index has chugged along smartly, adding nearly 6.7% for the year. It too, you'd think, is probably due for a correction.

But you might, like your overly-rational editor at the Old Hat Factory, be putting a bit too much thought into it. When it comes to stock prices, cash speaks louder than opinions. And with private equity cash (and debt) beginning to chase Australian shares, cash is beginning to shout at the top of its lungs. The word? "Buy!"

Dan Denning
The Daily Reckoning Australia

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