May Market Musings


Sell in May and Go Away?

I still don’t know what to make of this one. On the one hand, this is the time when most investors take their profits and go on summer vacations. Also while part of congress takes a break, there isn’t much action in the legislation arena. On the other hand, we do have the possibility of another “January Effect”, in the sense that while many panic out of their stocks, investors grab the bargains that they were barred from during the rally.

I believe that while we are value bullish, we must also be growth bearish. And while it is true that this bear-market rally may have some more room to run (much more) I think it is wise for those who made their money off the rally to sell at this point and pick up the bargains later on.

How To Play
In my opinion the best way to play this is to set a trigger to sell if the shares fall by a significant amount in one day (say 3-4%). This may hint that a selling wave has begun. Likewise if shares continue to rally, as they may, they will probably rally hard and fast, and then break down as all rallies eventually do.

So while energy, communication and transportation stocks have plenty of room to run over the next few years, I would rather be trading this bear market, than buying-holding and praying, that this rally doesn’t soon fade into another 1975 fiasco.

The Last Major Bear Market
Just some background on 1975… As the bear market and economic downturn of 1974 started taking its victims, there was a bear market rally amidst it all. Many investors called the “bottom” and loaded up on shares, only to find their portfolios sliced once again, and then plunging through their pre-determined support lines. This caused a mass panic with major news editirs such as Forbes and BusinessWeek writing dooms-day headlines such as “Dow 400?” and “Is there a bottom?”.

All tops are created in an environment of exhuberance and all bottoms are carved into one of desperation and panic. These events have yet to occur – although the fears of bank “nationalization” did come close. I don’t think we should even expect a full recovery in stocks until the Fed begins raising interest rates and cash value (including gold) rises.

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