Don't Jump into the Markets and Be an April Fool

"In the spring a young man's fancy turns to..." well -- to lots of things. But this year it would be all too easy to have our heads turned by a market that many pundits will soon declare has turned the corner. Don't fall for that seductive siren call. Don't be an April Fool!

No market goes straight down. No market goes straight up. In the past month we've seen investors a little less nervous as a result of the 12% bear market rally, and we've seen them despair any day it is down. There is reason for a certain caution on the former but certainly no reason to lament the latter. A plant that grows straight up without taking time to gain strength at its base will is thin, reedy and weak. So it is with markets. We need these occasional daily pullbacks in order to shake out the sellers who are going to sell too early. But just when, exactly, is early, and when is it the right time to sell?

I submit to you that it is too early to sell today -- but May will likely be too late. This is not a time to become complacent! Regular readers of our Seeking Alpha columns know that our penultimate offering here was titled, "Can You Hear the Bell Signaling a Bottom?" We wrote it on March 3rd, three trading days before the 2009 lows. We aren't perma-bears, nor are we day-traders. We seldom trade more frequently than once a month. All that frenetic buying and selling leads to is whipsaws and lower profits. But we are willing to trade somewhat more frequently at market turning points and during dangerous times -- like now.

In "Can You Hear the Bell Signaling a Bottom?", we recommended buying a number of fine companies just as many talking heads were predicting Dow 3,000. We didn't see it that way. Our advice was to buy underpriced (at $39) AAA securities like Royal Dutch Shell (RDS.A) at 5 times earnings and a more than 8% yield. We recommended the preferred stocks of many banks, natural gas companies, metals and mining firms, apartment rental behemoths, and health care corporations selling at 50 cents on the dollar and yielding as much as 14% -- for preferred shares! -- and they worked out even better. If you resisted the temptation to "sell everything" that was being blathered about during the free-fall to Dow 6300 and change, you are up 30-60% in these preferreds -- in less than a month.

So -- where do we go from here? No one can know with certainty, though there are plenty of less-honest, less-experienced analysts who will tell you they "know" what the market is going to do. The problem is that 50% of them "know" the market is going to go up, and 50% "know" that the market is going to go down! I was a geopolitical and economic analyst in the US Intelligence Community for 30 years. I don't claim to know the unknowable -- I simply believe that a measure of common sense, a dollop of humility, and a skepticism that kicks in when the madness of crowds takes over will allow one to do far better than the guru/entertainers on TV do.

Here's what the current market, and investors' reaction to it, indicate to me what is the most likely course of action. At least part of April will most likely continue the erratic upward zig-zag of March. That's the good news. But you would be an April Fool if, having failed to join us in our buying in early March, you now plunged into the markets. By the time "the news" is comforting enough to make you want to buy, we will be quite near the end of this rally. Hold'em if you got'em! But don't initiate anything but a smidgen of new positions.

If you followed our advice to buy in early March, you should now sell 75% of your gold positions. You have nice profits. Gold is an absolute lock for the long term -- our nation cannot run the printing presses 8 days a week without raising the rate of inflation, and nothing protects against inflation like gold. But short-term, gold looks tired and there are better alternatives.

Also, enter limit orders to sell any and all of the preferred stocks we recommended anywhere above 20. You bought these SVB Financial (SVB), Key Corp (KEY), PNC Financial (PNC), Wells Fargo (WFC) and US Bancorp (USB) $25 face value preferreds anywhere between 9.70 and 17.30, depending on the preferred and the perceived quality of the underlying bank. During April, as others get excited about the alleged end of the bear market, you should be selling to them. Ditto for your energy holdings in XOM, RDS.B, IMO, NRP and PVR. Given my expectation of a rally into April then a pullback that will test the faith of even the most ardent bull, at the right price I'm willing to part with even these old favorites (but will certainly buy every one of them back during The Dog Days of Summer.)

Don't chase the market. Instead, dole out half your position in even your favorite holdings as the New Enthusiasm for Stocks drives pundits to tell you the worst is over. Then, if you agree with us, sell the other half by the end of April. When you're nearly 100% in cash, it will be time to buy some inverse ETFs. That's when you'll see us delivering a list of the best inverse ETFs to own. If you get suckered in to the hype that the Great Bear died in early March, it will have been "April Fool!" on you...

Disclosure: Selling 75% of golds. Long the following preferreds (partial list:) CHK-D, USB-E, G & J, WFC-J, WSF, FWF, WCO, HCN-G, HCP-E &F, KVN, AIV-G, KVF, KVW, KTN, PNH, PNU, PNC-L, KEY-A,B,D,E & F, WRB-A, and SIVBO. We will sell any and all as they are 60-80% above our entry prices. Currently holding oils like RDS.B and XOM, natural gas like CHK, ECA and IMO, and coal land-lease firms NRP and PVR. We will sell 50% of all if/as the market rises toward 8500 or so and will sell more if it goes to the 9000 area. We will also place our first limit order for the first of the inverse ETFs we plan to buy: EEV at a limit of 36.

Comments

[Mark Bern:]

Sorry to say, I suspect you may be one or two trading days late on your sell advice. Other than the timing, I agree with your assessments. Asian markets are down hard today and Euope markets are also taking a beating at the open. Futures on U. S. markets point to lower openings.

All this primarily because of the announcement that the Administration has rejected the GM and Chrysler viability plans. This reminds us that there are still many issues that have not been solved and could go astray before we are completely out of this mess. Mr. Market does not like uncertainty. And there is plenty of uncertainty hiding in the shadows these days just waiting to pounce on the overly optimistic bulls.

Mar 30 06:21 AM

[abetterplace:]

Great advertisement.

Mar 30 07:45 AM

[ArtfulDodger:]

Good advice, perhaps, but I don't think I'm smart enough to follow it.

Mar 30 08:21 AM

[toobad41:]

What you are suggesting is that we become a personally managed ETF in your selected securities. That is more than what I want to do. Just purchase an ETF or two and not sweat the small stuff. You are also suggesting future a sell point for your securities in April. Isn't that market timing? I think it is. Market timing is also a fools errand.

Mar 30 08:49 AM

[L S:]

I applaud the author's note that no one really knows what the market is going to do. 50% will say up, 50% will say down. All true. However, I can do without the trumpeting of past successes ("Can You Hear the Bell Signaling a Bottom?" We wrote it on March 3rd, three trading days before the 2009 lows!!!). I have a feeling that a thorough review of the author's commentaries would find an equal number of suggestions that did not work out so well. I guess that's the advantage of constantly throwing out advice... you are bound to get some of them right (and brag about it), and you can neglect to talk about all the times that you got it wrong.

I am not a daytrader. I am not concerned about whether the market hit a short term peak on Thursday, and about the week to week gyrations that WILL occur. I'll continue to steadily contribute, dollar-cost average, etc... It isn't glamorous. It doesn't make for a great article. But in 5 years, 10 years, or beyond, it will likely make for a more sound investing strategy then trying to pretend that you can RELIABLY prognosticate and profit from the short term gyrations in the market.

Mar 30 09:04 AM

[kelm:]

Interesting article - glad you had a successful March. We need a consolidation period in all markets right now. Everywhere you look the volatility is extreme and that is serving to make the trade thinner and the extremes greater. A pause for a month or two in here will be a very good thing.

Mar 30 09:30 AM

[sundrenched:]

I picked up some USB preferred stock upon reading your article early March and didn't regret it. I'll keep reading your stuff. Thanks.

Mar 30 10:16 AM

[GMiki1:]

Gold may react to the G20 meeting--or not--but I wouldn't sell this minute. It's still undecided which way it's going short term.

Mar 30 10:17 AM

[j_remington:]

Its a trader's market

Mar 30 01:40 PM