When it comes to fears about major corrections in the world's markets, October is usually the month people look out for, thanks to its association with a couple of history's great crashes. When it comes to resource stocks however, October doesn't hold a candle to May. The phrase "sell in May and go away" has been a warning to the unwary for years.
Even though late spring/early summer corrections are viewed as a fixture in the market, they aren't quite as predictable or standardized as the "sell in May" bromide might lead you to imagine.
The chart above shows the TSX Venture index for the last three and a half years. We could have gone further back, but the basic story doesn't change much. The chart shows there have indeed been some nasty corrections in the past couple of Springs, but the timing and depth has varied widely. If you look farther back you would find even wider variation.
Last year's correction was particularly nasty, though the 2005 pullback was also large. Does this chart tell us anything about what might or might not happen this year?
2005 and 2006 had corrections of about 22% and 30% respectively, peak to trough. In both cases, those declines were preceded by long bull runs. The market moved up by 47% in 11 months before it topped in 2005 and an astounding 104% through 12 months before topping in 2006. That advance was punctuated by a couple of 10% corrections which may have added to its longevity.
Before we look at the current move, there are two other important points to note about the last two advances. One is that only one actually ended in May, the market topped in February in 2005.
The other important reference is at the top of the chart which displays the RSI or Relative Strength Indicator for the Venture Index. RSI calculation results in a value between 0 and 100. Values above 70 are considered "overbought" while those below 30 are considered "oversold". As you can see from the chart, the Index was well into over bought territory at both of the previous peaks, especially last year. So far this year, RSI has stayed below overbought levels, though not by much.
Heavy buying in the past few sessions gives contrarians like us pause, but the compa...
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