Pre-opening Comments for Tuesday May 5^th

* * * * Editor’s Note: Brooke Thackray is appearing on Market Call on BNN television today at 12:30 PM. He will be discussing seasonality in equity markets. * * * *

U.S. equity index futures are slightly lower this morning. S&P 500 futures are down 3 points in pre-opening comments. Traders are awaiting an update on monetary policy when Federal Reserve chairman Bernanke testifies before a joint Congressional Finance Committee starting at 10:00 AM EDT.

The Canadian Dollar is stronger again this morning. Yesterday, it broke above resistance at 85.02 cents U.S. This morning it broke above its 200 day moving average at 85.26. Next intermediate technical target is 92.5 cents U.S.

Chart courtesy of StockCharts.com www.stockcharts.com

First quarter earnings continue to exceed expectations. This morning, Kraft reported first quarter earnings at $0.45 per share. Consensus was $0.05 per share. The stock is up 2% in overnight trading.

Loblaw reported higher than expected first quarter earnings. Earnings were $0.40 versus $0.24 per share last year. Consensus was $0.35 per share.

‘Tis the season for gasoline prices to move higher until the U.S. Memorial Day holiday. Gasoline prices in southern Ontario increased $0.02 per litre last night to the highest level since last fall. Yesterday, wholesale gasoline prices in the U.S. broke above resistance at $1.55 U.S. per gallon to reach a six month high.

Chart courtesy of StockCharts.com www.stockcharts.com

Technical Action Yesterday

Technical action by S&P 500 stocks was exceptionally bullish yesterday. Thirty four S&P 500 stocks broke resistance yesterday and two stocks broke support (American Tower and Apollo). The Up/Down ratio rose from 2.02 to (300/127=) 2.36.

The list of stocks breaking resistance was too long to include in today’s Tech Talk. Energy, Semiconductor, Telecom and Utility stocks were notable on the list of stocks breaking resistance.

Technical action by TSX Composite stocks also was exceptionally bullish. Nine TSX Composite stocks broke resistance and none broke support.

TSX Composite stocks breaking resistance

Interesting Charts

Energy stocks on both sides of the border were major movers on the upside. The S&P Energy Index broke a key resistance level on Friday. The TSX Energy Index broke above a key resistance level yesterday. Favourable seasonal influences continue until the first week in June.

Chart courtesy of StockCharts.com www.stockcharts.com

Oil services stocks in the U.S. are leading the U.S. energy sector.

Chart courtesy of StockCharts.com

The China factor continues to work. The Morgan Stanley China Fund, the preferred way to play the Chinese market continues to trend higher.

Chart courtesy of StockCharts.com www.stockcharts.com

China related ETFs including Canada, Brazil and Australia continue to outperform the U.S. equity market.

Chart courtesy of StockCharts.com www.stockcharts.com

Chart courtesy of StockCharts.com www.stockcharts.com

Semiconductor equities and ETFs continue to lead the technology sector

Chart courtesy of StockCharts.com www.stockcharts.com

Several specialty ETFs broke key resistance levels yesterday and established intermediate uptrends:

Charts courtesy of StockCharts.com www.stockcharts.com

Thackray Market Letter for May

Brooke Thackray released his monthly letter yesterday. Brooke suggests using the 3Rs:

• REDUCING broad market exposure
• REDEPLOYING funds from underperforming seasonal sectors to outperforming sectors
• READJUSTING risk to be more conservative within sectors.

The letter includes a table showing that a $10,000 investment from 1950 to 2008 was worth $816,204 for investors who purchased the S&P 500 each year on October 28^th and sold on May 5^th. In contrast, a $10,000 investment during the same period for investors who purchased the S&P 500 each year on May 6^th and sold on October 27^th was worth $9,465.

Brooke’s monthly letter is free. To subscribe send an email to subscribe@alphamountain.com with SUBSCRIBE in the subject line. Also state your first and last name, city and country.

The Halloween Indicator (Buy when it snows, sell when it goes?)

MARK HULBERT

Should I go or should I stay?

Commentary: Halloween Indicator’s apparent failures are actually successes

By Mark Hulbert, MarketWatch

Last update: 12:01 a.m. EDT May 4, 2009

Comments: 15

ANNANDALE, Va. (MarketWatch) — One of the most difficult challenges investors face is knowing when a once-successful strategy should no longer be followed.

Take the so-called "Sell in May and Go Away" philosophy, also known as the "Halloween Indicator." Many of its erstwhile followers are wondering if it has stopped working, since jumping back into the market during the winter months has led to losses two years in a row now.

But I’m not so sure their arguments are sound.

A surprisingly strong case can be made that, its recent missteps notwithstanding, you should stick with the strategy. That would mean going to cash now and staying there until this coming Halloween.

The reason that erstwhile followers of this strategy are having second thoughts: The six-month period that ended last Thursday experienced a 12.4% loss for the Dow Jones Industrial Average ($INDU:

Dow Jones Industrial Average

That’s just the opposite of what followers of this indicator expected, since the stock market is supposed to have a positive seasonal bias during these so-called "winter" months.

This unexpected loss is more than just a one-year fluke, furthermore. The stock market also fell a year ago during the winter months — from October 31, 2007, through April 30, 2008, to be precise.

Nevertheless, I don’t think these missteps are good reasons, in and of themselves, to stop following this seasonal pattern.

I’ll explain why in a moment, but let me first review the statistical foundation of the Halloween Indicator.

Perhaps the best-known academic study of the indicator was conducted by Ben Jacobsen, a finance professor at New Zealand’s Massey University, and Sven Bouman of AEGON Asset Management, a Netherlands-based pension fund. Their article reporting their results appeared in the December 2002 issue of the American Economic Review, a prestigious academic journal.

The researchers studied the returns of 37 countries’ stock markets between 1970 and 1998. They found statistically significant evidence of the Halloween Indicator’s existence in 36 of those countries.

To focus on as broad as possible a sample of countries, the researchers focused only on the period back to 1970. But the seasonal pattern definitely appears in the Dow’s chart all the way back to 1896, when this benchmark was created. During the winter months over the 108 years prior to the past two winters, the Dow produced an average return, before dividends, of 5.18%. During the summer months, in contrast, the Dow’s average return was 1.85%.

Notwithstanding the last two winters’ losses, they do not constitute good reasons for calling this statistical foundation into question.

For one, it’s not clear that the Halloween Indicator was actually a failure over the last couple of years. The market may have lost ground in each of the last two winters, but it performed even worse last summer — when it lost 27.3% between May Day and Halloween.

The Halloween Indicator in effect is the historical tendency for stocks to perform better during the winter than during the summer, and this has been true in spades over the last two years. Followers of the indicator should be celebrating its success, not bemoaning its losses.

Second, even if you consider the last two winters to be "failures," they are hardly unprecedented. Since the Dow was created in 1896, there have been a dozen winters in which this benchmark lost more than the 12.4% that the market lost in the winter period that has just come to a close.

The historical support for the Halloween Indicator is based on averages, after all. Anyone who thought there was a guarantee that it would work in each and every year was fooling himself or herself.

Third, it’s also not unprecedented for the market to experience losses for two winters in a row, as it has in the last two years. In fact, the longest streak of losing winters came from 1937 through 1942 — six consecutive years in which the Dow lost ground between Halloween and May Day.

This losing streak was part of the historical record when the Halloween Indicator was first documented, so the current two-winters-in-a-row losing streak should hardly come as a big shock.

And finally, there is no evidence that the summers following losing winters have strong enough average performance to justify not "selling in May and going away." In fact, the evidence runs just the other way.

The summers following losing winners tend to be below-average performers, which means that the odds are even further stacked again the next six months than they are generally.

The bottom line? Nothing in the last two years constitutes a good reason to stop following the Halloween Indicator.

This doesn’t mean that everyone should immediately go to cash, I hasten to add. The tax consequences of going to cash might make it unwise to do so, for example.

But if you thought the Halloween Indicator was a compelling strategy two years ago, you should find it just as compelling today — if not more so.

Mark Hulbert is the founder of Hulbert Financial Digest in Annandale, Va. He has been tracking the advice of more than 160 financial newsletters since 1980.

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Disclosure: Mr. Vialoux does not own securities mentioned in this report.

Disclaimer: Comments and opinions offered in this report at www.timingthemarket.ca are for information only. They should not be considered as advice to purchase or to sell mentioned securities. Data offered in this report is believed to be accurate, but is not guaranteed.

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