We have had a nice run off the 1812 bottom for the S&P 500. However, it looks like we might be due for a breather.
There Are Four Things Concerning Me Right Now:
1. The Japanese Yen is appreciating. As I write this on a flight to Atlanta (back tomorrow, I will be flying for longer than I'm there) the Yen has had one of its best months in years. It's now up over 5% against the US Dollar. This shouldn't be the case due to the Japanese economy being in shambles with an exploding national debt, demographic nightmare, which I discuss in my new book: Surfing the Retirement Tsunami - Your Guide to Staying Afloat and Retiring Comfortably, and negative interest rates. My concern is that it is rising for one reason - hedge funds are covering their short positions because they plan to unload long positions in other asset classes such as stocks. You see, a strategy for hedge funds in the past has been to margin or leverage a short Yen and long risk assets such as stocks.
2. US bonds are soaring. The 10-year treasury yield hit 1.65% this week. Investors aren't buying bonds because they love the 1 1/2% yield for 10 years. It looks to me like a flight to quality. They are seeking shelter with a storm, possibly a tsunami on the horizon.
3. This is an election year, and politicians are not often elected by telling you how good things are, even if it isn't that bad. Billions of dollars will be spent by candidates telling you how terrible your life is and why they are the only ones who can fix it. Ugh, spare me the blowhard rhetoric.
4. My final concern is the "Sell in May" scenario which I discuss below.
6-month Top-Down Tactical View:
The clock is ticking against us. We are quickly approaching the infamous "sell in May and walk away" period. This is the time of year where the stock market typically fares the worst.
According to the Stock Trader's Almanac, $10,000 invested at the beginning of May and sold at the end of October every year since 1950 would be showing a loss today. On the other hand, that same $10,000 invested on every November 1 and sold at the end of April would today be worth $702,000, giving you a compound annual return of 7.10%.
Even more astounding is that since 2000 the Dow Jones generated only 4%, while the long winter/short summer strategy generated a stunning 64%. Of the 62 years studied, the market was down in 25 May-October periods, but negative in only 13 of the November-April periods, and down only three times in the last 20 years.
There have been just three times when the "good six months" have lost more than 10% (1969, 1973 and 2008), but with the "bad six month" time period there have been 11 losing efforts of 10% or more.
I have never heard a definitive answer as to why that is but my belief comes from my friend John Thomas' theory that until the 1920s, the United States was primarily an agricultural economy. Farmers were always at maximum financial distress in the fall, when their spending was the highest for seed, fertilizer and labor with the earnings from the sale of their crops still months away.
Therefore, the economy had to borrow all at once, placing a massive strain on the financial system. This is why we have seen so many stock market crashes in October.
Naturally this is not a given and one thing we must be wary of is that stocks have had a dismal last six months during this "normally" good time. This could be one of those years where it is reversed.
With the clock ticking against us, investors should become a little more defensive but also take advantage of bargains. I do not expect a "crash." Just more of a sideways move, so buy the top growth sectors on dips such as cyber security through FireEye (NASDAQ:FEY), Palo Alto Networks (NYSE:PANW) and the PureFunds ISE Cyber Security ETF(NYSEARCA:HACK). In addition, growth investors can buy Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT), which is the staples for every computer made; Intel (NASDAQ:INTC), which is getting hit and a good buy at these prices; Google (NASDAQ:GOOG) (NASDAQ:GOOGL), which has had a nice rebound but still a great time to step in as their growth potential is in the stratosphere; Netflix (NASDAQ:NFLX), which revolutionizes media delivery and will have the earnings to prove it; Facebook (NASDAQ:FB), a social media staple and is winning over the older crowd, which are the people with money; and Amazon (NASDAQ:AMZN) which practically owns the online marketplace. For a broad-based approach, you can simply buy the market ETFs like the PowerShares QQQ Trust ETF (NASDAQ:QQQ) and the SPDR S&P500 Trust ETF (NYSEARCA:SPY). The WisdomTree Europe Hedged Equity ETF (NYSEARCA:HEDJ) is the play for a European resurgence as it is long EU stocks and short the currency. If you are cautious and want to play the downside, or want some portfolio insurance, look toward the ProShares Short S&P 500 ETF (NYSEARCA:SH) or the iPath S&P 500 VIX Short-Term Futures ETN (NYSEARCA:VXX)
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.