Welcome to May – the official beginning of the silly season for the financial markets.
And the month kicked off in excellent form, with strange peaks and troughs appearing all over our charts on Sunday night – in large part caused by the announcement of Osama bin Laden’s death.
Which brings me on to the big story this week: “Has the bottom fallen out of the commodities market boom?”
Buy-and-hold investors let go as the commodities market falls
The old trading adage is that you “Sell in May, and go away ….” It’s based on the theory that markets make the majority of their gains in the winter months, so you should buy in November, and sell at the end of April.
While this may sound like mumbo jumbo – it is in fact held up by over 300 years of market data.
In the UK equity market, for example, getting out of the market from May to November has beaten the market in 92% of all 10-year periods.
And similar results can be found across many of the largest indices.
Of course, this really only affects the buy-and-hold investor, as spread betting allows us to profit from the markets whether they’re going up or down. But I would say that these are months to turn down the volume on any bullish bias you may be feeling.
The big bull run
And the biggest bullish bias in recent months has been in the commodities markets.
Oil, gold, copper, and most recently silver, have all seen big upside moves over the couple of years, as these two-year charts show …
Copper prices since May 2009
Gold prices since May 2009
Silver prices since May 2009
Oil prices since May 2009
As you can see, the one that really fell of a cliff this week is silver.
One Fortune journalist this week described silver as the “canary in the commodity coalmine”. So, is silver showing us what’s around the corner for oil, gold and copper prices?
Pressures on the oil price
If you’re one for seasonal trading, then May is certainly not traditionally a month to getting out of oil …
The end of this month marks the firing up of one of the planet’s biggest drains on our fossil fuels – the American gas-guzzling automobile.
The US “driving season” is about to begin.
This begins on the Memorial day weekend, and is the period when Americans (who only get a miserly two weeks of holiday each year) drive off to the countryside for weekends of r&r.
The Americans aren’t happy though – as they’ll be forced to dig deep into their pockets when they fill up their gas tanks this year.
In the US, the price of a gallon has the same kind of effect on the national psyche as the price of a pint does in the UK. And they’re spitting feathers at the $4 price tag they are currently facing.
So, if demand is about to surge, why has the price of oil fallen every day this week?
The first reason is the “silver effect” – investors are spooked on commodities.
The second reason is supply and demand.
US oil supplies rose more than expected last week, plus disappointing financial data in the US has raised concerns about demand, and about consumers “holding back” at the pumps.
The long-term view on oil is still predominantly bullish, but the current pull-back should be watched closely. As I write the daily charts have breached the lower Bollinger band and the 50-day moving average …
Proceed with caution.