Markets Pause as Investors Start to ‘Sell in May’

Stock markets across the globe pulled back this past week as the Dow Jones dropped 1.00%, the S&P 500 fell 1.20% and the NASDAQ tumbled 2.30%. The MSCI Emerging Markets Index fell 2.65% for its first bad week in about a month.

Big gainers in your Alpha Investor Letter portfolio included Illumina Inc. (ILMN), which added 1.44%, and Berkshire Hathaway (BRK-B), which bounced 1.43%. Berkshire Hathaway (BRK-B) moved back above its 50-day moving average to a BUY.

Reflecting the strength of international markets, the Vanguard Global ex-US Real Estate ETF (VNQI) hit a new 52-week high.

You were stopped out of the PowerShares DB US Dollar Bullish ETF (UUP) for a solid 10.07% gain.

Several of your positions dropped below their 50-day moving averages and moved to a HOLD. These include the Guggenheim Spin-Off (CSD), the Global X Guru Index ETF (GURU), Vanguard Russell 2000 Index ETF (VTWO), Skyworks Solutions Inc. (SWKS), iShares Currency Hedged MSCI Germany (HEWG) and Google Inc. (GOOGL).

I have already written about the weak seasonality of this time of the year. “Sell in May and go away” is the well-documented tendency of markets to underperform during the months of May through October.

That said, I just came across some contrarian information that suggests that the U.S. stock market could be due for a bounce.

Recent data suggests that investors are migrating out of the “big four” exchange-traded funds (ETFs) that track the major U.S. stock indexes in a big way. The flow of money out of SPY, QQQ, DIA and IWM totaled more than $16.5 billion in April. That’s the fifth-largest monthly outflow for those four funds in the past 10 years.

As it turns out, any outflow that totaled more than $15 billion coincided with lows in stocks, at least as measured by the S&P 500 Index. Going back a decade, there were eight months with an outflow that large, and a month later SPY was higher every time, averaging an impressive 4.2%. If the S&P 500 were to match this average performance, it would be trading at a record 2,176 a month from now.

There are several alternative explanations for the latest outflows from the large ETFs, including the migration to other “smart-beta” ETFs, which I discussed in yesterday’s issue of The Global Guru, as well as a shift toward international ETFs.

But looking at past instances of extreme flows in these funds, the recent track record of this indicator has been very solid and is perhaps a surprising positive for stocks.

Portfolio Update

Berkshire Hathaway (BRK-B) added 1.43% last week. The highlight of BRK-B’s week happened last Saturday as nearly 40,000 Berkshire Hathaway shareholders made the annual financial pilgrimage to Omaha, Nebraska, to attend the firm’s annual shareholder meeting. This year marked the 50th anniversary of Mr. Buffett heading the company. He has led its shares up over 2,850,000% since taking the reins in 1965. BRK-B bounced off its 200-day moving average (MA), broke through its 50-day MA and became a BUY.

Global X Guru Index ETF (GURU) fell 2.01% last week. Investment gurus have been on a roll over the recent weeks, as your position in GURU is just coming off a new 52-week high. “Hedge fund clones” like this one typically do quite well at matching the investments of the money masters. In fact, GURU beat the performance of actual hedge funds in 2014. GURU dipped below the 50-day MA yesterday to become a HOLD.

Markel Corp. (MKL) lost 0.65%. MKL may be the “Baby Berkshire” in your portfolio, but make no mistake: this well-run firm is a stand-out financial performer. MKL will report earnings after markets close today, giving us insight on its future ability to add to its current 16% gain in your portfolio. MKL is a HOLD.

Skyworks Solutions Inc. (SWKS) closed the week flat, dipping just 0.09%. SWKS beat the street as it reported quarterly earnings last Thursday of $1.15 earnings per share (EPS) vs. a $1.13 EPS analysts’ consensus estimate. Sales came in at $762.1 million vs. an estimate of $752 million. Brean Capital maintained a “Buy” rating on the stock with a $110 price target, while MKM Partners retained its “Buy” rating and $120 price target. SWKS dipped slightly below the 50-day MA to become a HOLD.

Cambria Global Value ETF (GVAL) added 0.04%. Although GVAL’s net gain was slight last week, this exchange-traded fund maintained its position from its recent move above the 200-day MA. This value play on global markets remains well-positioned for further gains. GVAL is a BUY.

iShares Currency Hedged MSCI Germany (HEWG) fell 4.46% last week. The mighty U.S. dollar has pulled back sharply from overbought levels. Likewise, this currency-hedged position has moved lower in lock-step with the dollar. However, with Europe making a sustained comeback and the dollar’s rise likely not over, this position remains poised to gain. HEWG dipped below the 50-day MA to become a HOLD.

Latest Special Report

As a courtesy, I invite you to view the newly created special report, ‘Is Gold Ready to Shine?’ Eagle’s 5 Gurus Weigh in, which features my take on the gold market, as well as bonus commentary from each of my fellow investment newsletter editors at Eagle. This report and others are available FREE on my website to you.