By Clem Chambers
For many years in the last decade the “Sell in May and go away” strategy kicked off with a bang as a correction slammed the equity markets with vengeance. Last year it didn’t happen and this year, while summer weakness is in evidence, there is yet to be a vertical market slump.
Something has changed. The trend is your friend until the bend in the end, so they say. The bend in the end is when the trend changes. This occurs when there has been a systemic reversal and a tipping point has passed. A new trend is hard to spot early on because at the start there is not much trend to spot. However, a sign that things are behaving differently is a clue that a new era may have begun. The lack of a May correction appears to be such a signal.
This is especially highlighted by an unexpected May crash in the Dubai stock market, which was one of the big risers last year. It is a textbook May crash at the right time but in the wrong place as the expected European/US correction moved into the developing world. In my market model the developed versus developing world is the key global economic pivot. However, the balance flipped about 18 months ago. Before that, the boom was in the developing economies and the bear was in the developed world. Now the developed world is in a bull and the developing world is in a bear. The mechanism pushing floods of cash into the developing world is in retreat and that global flow of funds is washing around the developing world.
“The trend is your friend until the bend in the end, so they say. The bend in the end is when the trend changes. This occurs when there has been a systemic reversal and a tipping point has passed. A new trend is hard to spot early on because at the start there is not much trend to spot.”
Suddenly the genius of the BRICs is looking like the same old bunch of badly run corrupt governments; the badly run economies of the west are looking like they are on the road to recovery. Give it a year and the west will be claiming genius and the once unstoppable juggernaut of the developing world will be forgotten and recast as the irredeemable underdeveloped world.
This won’t last, of course, and the pivot will flip again as the developing world catches up with the developed world soon enough. Nevertheless, there is at least another cycle to go. For now, there is a boom and bubble on its way to the US and Europe. The good times will roll again. The last equity market boom and bubble ended nearly 15 years ago, so people forget what a real boom is like. There is a chance that the market could therefore be in for a very big rally indeed and it is interesting to look at the history of the BRIC markets to get some idea of just how far the markets can go in a definitive bull market. America and Europe are not Japan, they will not suffer a generation of deflation, and their whole infrastructure cannot withstand a deflationary recessionary continuum.
America has led the way with its titanic reflationary strategy and this has driven the developing market booms. This reflation is finally resurrecting the economic activity of the west and it may bring about a boom at home. Even with the US markets at all-time highs, this summer could be the end of the beginning of the rally rather than the beginning of its end. There’s little guidance to how things will unfold. The business of making money will be tricky because in a bull market there is only one real call- when to jump off the runaway train. For now that may be a long way to go, but at some point in any rally, when you look at your profits and think what a clever fellow you have become, you should think about selling. As the old saying goes, you should never confuse your brains with a bull market – and there is a chance what follows will make all bulls feel very brainy indeed.
Clem Chambers is chief executive of the leading stocks and shares website ADVFN.com and author of titles including ‘101 Ways to Pick Stock Market Winners’.
Visit www.advfn.com to access free, realtime stock prices. Follow Clem on Twitter:@ClemChambers, email: clemcham@advfn.com.
