May 2nd, 2008

Are we about to launch an old-fashion "summer rally"

Let me tell you of my own experience with this “sell in May and go away” faux-theory. It’s sort of deja vu all over again. It was May, 2006 and the Dow 30 had just touched its all-time high made 6 years earlier. “Sell in May” was on everyone’s tongue.

Along with many others, I’d experienced a couple of really terrific years as the market steamed ahead from the bottom in March 2003. I was anxious about losing the profits I’d made so I decided I, too, would run for shelter. I sold nearly everything and, trying to pick up some extra spending money, began shorting some of the high-fliers over the previous year. On May 15, 2006 in a piece called Major Stock Market Correction in the Offing?, I wrote the following:

If you do a Google search on the term “sell in May” you see articles many articles, some going back to 2001, and many conflicting opinions. One of the most current is one that Sam Stovall wrote for Business Week on May 4, 2005 entitled “Sell in May, But Don’t Walk Away“. He enumerates some of the reasons why this saying actually came into being … but concludes:

“an investor who was long on the market from November to April but then adopted a defensive approach by rotating into either the S&P consumer-staples or health-care sectors during May through October, would have found — as can be seen in the chart below — that the returns were worth the effort.”

I did my own research and came up with these statistics:

For the 25 years 1980-2005, July-September have been the only months when the S&P500 has experienced declines more often than increases.

Contrary to my basic nature, which is basically optomistic, for the first time in my investing life, I moved a significant percentage of my portfolio into cash. Most of the sales were in the latter part of the week so I still shared in the market’s losses. But, taking a high altitude view of the economic and stock market terrain and remembering one quarter’s opinion that we are basically in a long-term secular bear market, I feel comfortable that the worst that can now happen to me is that I have undone positions that I may experience “opportunity costs” as the market successfully weathers this correction as some currently unforeseen positive political or economic events magically appear. But I won’t suffer actually losses if the sell-off that began last week gathers some accelerates and heads into a 10-15% correction.

While I not a fan of shorting since I’ve never made money betting against the market, I’m revisiting sectors previously identified as shorting candidates (like the recent May 1 post entitled “Homebuilders and Google: A Bear’s Perspective” also in March 7 in “Selling Homebuilding Stocks Short?“) to see whether I can make some profitable quick trades as the market corrects.

But I learned a lesson. Shorting individual stocks is a fool’s game, at least an individual investor would be a fool trying it. I did have a few profitable trades (I still remember shorting SBUX … but covering as it quickly recovered from a brief dip. If I’d only held on I could cover today at 40% of what I paid then) and losing money on most. As it turns out, that correction wound up being about 9.5% and lasted a mere 4-8 weeks.

As we all remember, market peaked in October, 2007 higher than it’s peak in May (even though there was a frightening corrrection in July and August).

Since then, I’ve developed and back tested my Market Timing Indicator (MTI). This year, I’m going to let the market, not the talking heads, tell me what to do. For the past several days, I’ve been talking about the crucial cross over that, hopefully, is about to take place. If the market’s able to move up another 1.2% to 1427 (which it could do either tomorrow of early next week), then this could be a rip-roaring, old-fashion summer rally.

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