In skimming and reading some research reports this weekend a generally theme seemed to evolve… opinions on ‘sell in May and go away’. The age old adage that investors, can in general terms, sell in May, come back in September or October, and not miss anything in the equity markets. Or better yet, avoid the downside risk of the summer months. The analytic in me decided to narrow it down to the top three ideas from this theme.
First, the majority were on the side of this having been a great year to follow the theme exactly. In fact, they thought you could even sell now, get an early start, and head out. Based on the current market levels and state of the economic data… something has to give at some point. Consider that 16 of the last 17 economic reports have missed expectations. Friday was the latest disappointment with retails sales missing badly, consumer sentiment retracting to levels not seen for months, and business inventories, if correct, will disappoint those hoping for a 3% growth in GDP. It is hard to buck the trend that is currently in place, but coming off a week with a net 2% gain for the broad indexes, maybe it is a good idea to head for vacation early and extend it some. After all, the bump higher in Treasury bonds hasn’t been bad either as money flow has picked up in the sector. That must be all of those leaving early to get a head start on some much deserved R & R!
Second, play the defensive stocks. Now that has been a theme long before now or the May period theme. Investors have been favoring the defensive sectors already. In fact, the sector is looking ‘pricey’ relative the fundamentals. If the P/E ratios are high and the market does decide to correct or pullback, these stocks currently look just a susceptible to the losses as the growth sectors do generally. I would be more inclined to believe there is less downside risk in the technology stocks than there are in the consumer staples. The other part of the defensive play is to buy bonds as a hedge against the downside of stocks. If you look at a chart of TLT, IEF, LQD or IEF you would believe that most investors have already gotten a jump on that strategy as well. The yield on the thirty year Treasury bond has fallen from 3.25% to 2.91% in the last four weeks. That has translated into a 6.25% gain for TLT, iShares 20+ Yr Treasury Bond ETF. Not a bad return for a bond. That growth has doubled the annual yield in only one month. Again, the theme isn’t a bad one, but you have to worry that the best part of the gains have already been experienced.
Third, look for opportunities in the lagging sectors. I like the idea, but if the concern is for the market to correct, then the sectors will still offer downside risk. However, the thought process is the downside will not be a great as owning the leaders. That may very well be true, unless the downside catalyst is caused by those laggards getting worse. Take gold as an example on Friday. The metal has been a laggard all year, and down roughly 7.5% heading into Friday’s trading. The metal sold off nearly 5% in one day. Most times the lagging sectors are lagging for a reason! Technology was the most quoted sector to watch to buy going forward. The PC shipping report showing a drop of nearly 14% on Thursday was a big negative for the sector pushing it lower for the day. I know there is more to the technology sector than just PC stocks, but it is a component that has a far reaching impact. It is worth building a watch list of the sectors that have been lagging and look for them to reverse going forward, but adding them because they have underperformed isn’t a great idea.
When all the advice from the analyst is said and done, and the consensus in, we have to focus on what we are attempting to accomplish with our money first and foremost. Then we need to have a predefined strategy for managing the risk of the markets moving forward. Fear, hope and greed are the guiding emotions of investors, having a strategy to avoid them in your portfolio will separate success from disaster. Stay focused, be disciplined, and remember, there is nothing wrong with an extended vacation following a successful four month run in stocks.