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Sell in May and go away - that's the old adage, right? Tried and true most of the time and often followed by some good summer market performance. It's supposedly even more reliable during a presidential election year. At least that's what some statistics seem to indicate. Of course sometimes you can't always go by statistics. This may be one of those years when you throw the statistical averages out the window.

The markets have sold off sharply the last 4-6 weeks and all three of the major indices have fallen below their 200 day moving averages. Some analysts are saying the markets are near a bottom and are waiting for and even anticipating the start of a recovery. Others are looking for an additional 10% shave. I believe a small short term "bounce" may take place but be very careful here. There are a few wildcards in play right now that could make the second half of 2012 a very tricky one and could lead to a further trajectory downward for the markets. Some of them are:

  • The situation in Europe. It's been a drag on the market for a while now and will continue to put pressure on financial markets. Greece and Spain are a mess and a good portion of the European Union will be in recession for 2012.
  • Recent economic data is showing that the Chinese economy is slowing down. They weren't going to grow their GDP at 10% a year forever and now their economy appears to be cooling off as they transition into a mature economy. The slowing of China's growth will have an impact on the rest of the globe.
  • In addition to China's slowing economy, the U.S. economy is slowing down too. Economic data has been showing factory orders slowing, job growth stalling and an overall softening of the business climate.
  • And of course the "Fiscal Cliff" is fast approaching. At the end of the year the Bush tax cuts and payroll tax holiday are set to expire and automatic spending cuts enacted unless our congressional leaders can hammer out an agreement. Our political leaders in Washington will probably work it out, but not before a lot of school yard wrangling and playing a dangerous game of chicken with the U.S. economy that will certainly not help out the financial markets at all. Allowing the Bush-era tax cuts to expire coupled with the scheduled round of automatic spending cuts would probably throw the U.S. economy into a serious tailspin. That's the dire warning from a new Congressional Budget Office report that says the economy would contract by 1.3 percent in the first half 2013. That's when a higher tax rate would kick in if the Bush-era tax cuts aren't extended and more than $100 billion in automatic cuts in domestic spending put in place.

So what's an investor to do?

Hopefully you set stops on many of your stock positions and didn't ride them down with the declining markets, preserving your capital and bolstering your cash position. The following are just a couple suggestions to help you through the next few volatile market months.

  • If you haven't already started putting together your "watch lists" you should start doing so. Keep a list of the strongest stocks, special situations and best values. It might be the financially solid tech stocks like Intel, (INTC) Texas Instruments, (TXN) and Microsoft (MSFT) that all pay a decent dividend and may get to bargain prices due to the next few months. It might be stocks from the energy sector or some other area. Watch their relative performance to the market, if they're moving back over their moving averages and their business developments.
  • If you do decide to take a position in a stock, start off small and average up if you want to increase your position. Never average down, especially in down and or volatile market.
  • Set appropriate stops for your positions and be disciplined about them. If after your evaluation the position you took is not working out for you get out and minimize your loss.

Conclusion:

Economic uncertainty abounds right now and will for the foreseeable future. However, that uncertainty can provide great bargain hunting and you can still reap some nice profits during these market transitions. Be patient, disciplined and methodical as you approach your investing and you can still do well.

Source: OK, You Sold In May... Now What?