When it comes to investing, they say “the trend is your friend.” But despite other supportive allies propping up in today’s bull market, three price charts in particular are warning investors to direct their attention to another investing proverb. Sell stocks in May and go away.
There’s plenty of popular sayings and quotes on Wall Street. “Let your winners run” and “don’t fight the Fed” are two that should resonate with investors today. The fact is many of us have been happily riding a historically friendly bullish rally since the market abruptly finished its novel coronavirus-driven bear market in late March.
The problem with this sort of blanket advice, which sounds quite reasonable today, is there are also axioms for most every occasion. That makes for a ton of contradictions. And to simply turn a blind eye isn’t a good idea. The fact is other quieted truisms or infamous quotes such as “bulls, bears but not pigs make money,” or “sell when others are greedy” will reemerge as popular conversation points around socially distanced water coolers after taking profits becomes less lucrative advice to act on.
Despite those shortcomings, I’m asking investors to trust it’s not too late to sell stocks in May and go away. More aptly, it’s time to manage portfolio risk in stocks from Amazon (NASDAQ:AMZN) to Zoom Video (NASDAQ:ZM) and all those sandwiched in-between or inside two quesadillas like Chipotle (NYSE:CMG). The following are main indicators of trouble ahead:
Let’s now look at three charts that support the observation that it’s time to reduce risk and sell stocks rather than come to the party late in today’s bull/bear cycle.
Key Indicators Warning Investors to Sell Stocks: Goldman Sachs (GS)
Source: Charts by TradingView
Our first warning to sell stocks and trim risk in our portfolios is Goldman Sachs. The veritable banker sometimes referred to as “Mr. Market” for its institutional trading muscle (or “vampire squid” by some other accounts) is not doing well technically. And that could have broader and bearish implications.
As the daily chart shows, GS stock has struggled throughout all of 2020 so far. After failing to rally above its March 2018 all-time high from a channel breakout, shares were swept lower during the broader market’s Covid-19 ills. The action was bad, but not entirely suspect given the circumstances.
Now, though, an ominous canary has entered the picture. Over the past month, GS stock has under-performed relative to the S&P 500. Specifically, the stock has been stymied at the 50% retracement level as a bearish-looking head and shoulders continuation pattern has developed.
A nearby failure of the pattern’s neckline and sickly looking stochastics may have bearishly leading implications for the market. Not that Goldman is alone. Peers JPMorgan Chase (NYSE:JPM) and Bank of America (NYSE:BAC) have shown similar weakness or even greater bullish betrayal in recent days.
Take Goldman Sachs’ price chart as fair warning to sell stocks and manage risk before an unusually generous bull market likely stumbles.
CBOE Volatility Index (VIX)
Source: Charts by TradingView
The next market indicator warning to sell stocks today is the CBOE Volatility Index. Known as both a gauge of investor complacency and over-the-top fearful behavior, signs are pointing towards a second round of bearish price action.
Alongside a fatigued-looking S&P 500 that’s encountering resistance from its 62% retracement level, the VIX has reversed back above 30%. It could be an important warning. A volatile weekly hold of the 76% retracement level from the fear gauge’s explosion to 85% in late March and oversold stochastics are troubling as a bearishly undesirable bottom for the market could be at hand.
I’d be remiss not to note this instrument is mean reverting, i.e., both zero and infinity are out of the question. Furthermore, the 30% threshold has historical precedent as being associated with unsustainable levels of fear. It stands to reason that’s good news for bulls. Still, following a record-breaking bear market, I see the VIX positioned as another sign to sell stocks before unusually strong profits evaporate.
Source: Charts by TradingView
The final price chart hinting it’s not too late to sell stocks in May is Clorox. When did the household, non-durable products company become a growth stock? Maybe longer than you realize as evidenced by the long-term monthly chart. But this is one burly trend that’s increasingly at odds with the market’s own friendly behavior of late.
In 2020, the coronavirus emboldened the price trend in CLX stock as consumers hoarded antibacterial sanitizers and what not. That’s not exactly a revelation. But continued relative strength and price momentum not unlike what you’d find in traditional growth stories such as Tesla (NASDAQ:TSLA) or Shopify (NYSE:SHOP) — all despite a significant retreat of the virus — is concerning.
Technically, May’s bullish price jump outside the monthly Bollinger Band in CLX stock has its challenges. As the chart reflects, there’s plenty of Fibonacci-based extension levels, which are coming into play from some quickly drawn two-step patterns. Stochastics are also overbought. Still, this is a monthly chart and locating a top in Clorox may not come quickly.
To be clear, investors don’t need to wash their hands of today’s bull market and sell stocks until they’re floating in cash. But along with our other indicators, Clorox is delivering a whiff that today’s bull market may be in for a deeper cleaning in the days ahead.
Disclosure: Investment accounts under Christopher Tyler’s management does not own any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.