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Stocks Looking Shaky Lately? Don't Sell in May and Go Away

We've been getting a lot of spooky economic data lately and some unsettling corporate earnings commentary. And just as fundamentals are beginning to look a tad soft, technical aspects of the stock market are doing some scary things, too, making many investors think that stocks today are to be avoided.

But investors need to chill out during such times. As Tom Sowanick, chief investment officer at OmniVest Group, reminded clients this week: "Calling market tops and market bottoms can be very painful and often times [more] wrong than right."

True, on the data front we got a crummy report on durable good orders, while initial jobless claims and revised first-quarter GDP figures missed economists' forecasts. (Which may not matter, as my colleague Mark Thoma explained in his analysis of GDP.) Personal consumption took a dive, too. And all of this came out on one day. Whew.

Then there are market technicals. Technicals look at price movements and volume (speculators' sentiment, essentially) and there's been much gnashing of teeth lately over what the technicals have been telling us. The S&P 500, you see, keeps falling below its 50-day moving average. What this means in plain English is that traders take the breech as a warning sign that the market is due for a pullback -- or perhaps even an honest-to-goodness correction, which would lop 10 percent off current market levels.

But as Sowanick points out, these technical scares have been feed for chicken littles many times of late -- and not much more:

While it is true that the [S&P 500] has fallen below its 50-day moving average, it is also true that since the start of 2009, the moving average has been breached six other times. Over this entire period, the S&P 500 Index managed to gain no less than 50.6 percent. The point worth making here is that the overall trend of the market is often times much more powerful than a short-term change in a technical reading.
The bond market isn't freaking out, either, Sowanick notes, and corporate earnings remain strong, making it premature to hit the panic button just because some technical indicator has been breeched. If anything, market weakness should be taken advantage of with some careful, incremental buying, not selling, he says.

Buy low, sell high, remember?

"Following the 50-day moving averages may prove to be a valuable tool for traders, but it seems less useful of a tool for long-term investors," Sowanick says. So make sure you're diversified, enjoy the long weekend, and remember why we observe Memorial Day.

Photo courtesy of Wikimedia Commons.
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