Sell In May: 3 Reasons To Sell Before Earnings Season Ends

 |  Includes: SDS, SPY
by: Trade In Mexico

There is a big debate going on over whether or not investors should follow the stock market adage "Sell in May and go away". Just as earnings season was drawing near, the market was starting to look weak. But then earnings started rolling in and many companies reported solid results that often beat expectations. All this great news, plus the release of better than expect manufacturing data has powered some of the major indexes to new 4 year highs.

The S&P 500 SPDR (NYSEARCA:SPY) is now up over 10% in 2012. However, declaring victory is premature and the market is also hinting at signs of weakness. On May 1, it started to roll over into the close after what had been a triple digit advance for the Dow Index. Many of the recent rallies might be nothing more than short-covering and this explains why they often fade out. The surge in 2012 has provided gains that would make many investors happy for an entire year, and that is why I would take them now.

There is a strong chance that the easy money has been made for 2012. It seems that after the run this market has had, it would be lucky to gain another 5 to 10% for the rest of 2012. I will give up a potential 5 to 10% gain if the best case scenario plays out, in order to avoid a potential 20 to 30% loss if some of the worst-case scenarios come about.

As earnings season is coming to a close, investors will no longer be seeing headlines full of quarterly earnings beats, but rather far more daunting issues that could send the markets down. Here are a number of concerns that are likely to move to the top of the headlines as we go further into 2012:

1. Headlines from Europe could move to the front-burner once earnings season ends. There are plenty of negatives to consider that are coming from the Euro-zone, including massive unemployment of about 24% in Spain, what some would call a depression in Greece, and rising risks that contagion will spread throughout Europe. Adding to the list of issues is new data which confirms the U.K. just went into a double-dip recession and elections in France next week in which a socialist candidate that hasn't been so agreeable towards Germany could win.

2. While the first quarter earnings reports from companies in the United States have been generally good, investors will start looking forward and recent data indicates that the economy could be slowing. This might be a recipe for lower earnings in the coming quarters. Just days ago, new data showed that orders for durable goods plunged about 4.2%. The March jobs report also came in weaker than expected.

3. The United States is facing significant financial challenges as taxes are due to increase in 2013, and at the same time also possibly face mandatory budget cuts. The combination of higher taxes and reduced government spending is the type of austerity that is sending a number of other economies sharply lower. This country is facing another debt ceiling challenge around November that is similar to the one in 2011, which led to a downgrade of the U.S. credit rating.

S&P 500 SPDR (SPY) is an exchange traded fund that tracks the S&P 500 Index. Investors may want to consider buying puts on this in order to protect gains of over 10% for 2012.

Key Data Points For SPY From Yahoo Finance:
Current Share Price: $140.74
52-Week Range: $107.43 to $142.21

ProShares Ultra Short S&P 500 (NYSEARCA:SDS) is an exchange traded fund that correspond to twice the inverse of the daily performance for the S&P 500 Index. This basically gives investors a chance to short the S&P 500 Index by a factor of two. This investment has plunged to 52-week lows as the markets have surged, but if the challenges listed above take hold and send the markets lower, this could make sharp moves to the upside.

Key Data Points For SDS From Yahoo Finance:
Current Share Price: $15
52-Week Range: $14.77 to $28.73

Data is sourced from Yahoo Finance.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.