Why Investors Expect To "Sell In May And Go Away"

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After a volatile month, ETF investing strategists expect the stock market to follow the seasonal "sell in May and go away" script as many technical indicators are warning that a sell-off lies ahead.

"The stock market tends to be weak from April to June in midterm election years," says Simon Maierhofer, founder of San Diego, Calif.-based iSPYETF.com.

He expects to see a correction in May and June, followed by a year-end rally into late 2014 or early 2015. He recommends that investors sell short to profit from falling prices, depending on how much risk they can tolerate.

Eye On Capital Preservation

"But more important at this point is capital preservation and eventually re-establishing some exposure for the year-end rally, which may turn out to be the last leg of this bull market," Maierhofer said in an email. "There are some bearish divergences indicative of a slowing trend but not the kind of divergences usually seen right before major market tops."

With just two days left in the month, the SPDR S&P 500 ( SPY ) was up 0.88% in April.PowerShares QQQ ( QQQ ), tracking the 100 largest non-financial stocks on the Nasdaq, was down 0.56%.SPDR Dow Jones Industrial Average ( DIA ) was ahead 0.92%.IShares MSCI EAFE Index ( EFA ), tracking developed foreign markets, outpaced all major indexes, adding 1.2%.IShares MSCI Emerging Markets Index ( EEM ) was 0.66%.

Many technical indicators are flirting with levels seen at previous market peaks, foreshadowing a correction, says Brad Lamensdorf, chief investment officer of the Lamensdorf Market Timing Report in Westport, Conn.

Currently 41.4% of total household assets are invested in stocks, which is similar to levels seen at the previous market peak in 2007, Lamensdorf wrote in his newsletter Friday.

Shaky Batch Of IPOs

Some 83% of initial public offerings have unproven business models and negative earnings, reminiscent of the Internet bubble in March 2000 when an all-time record 84% of IPOs had negative earnings, Lamensdorf notes.

Furthermore, margin debt -- the amount of money that investors have borrowed from their brokers -- has reached an all-time high. Borrowers will eventually have to pay it back by selling their holdings.

Investors have become overly aggressive, as trading in penny stocks -- the most speculative area of the market -- has soared to new highs.

The meltdown in copper suggests that the economy is weakening -- a very bad omen for stocks. The red metal is known as the only one to have a Ph.D. in economics because of its widespread use in everything from consumer gadgets to construction. Lamensdorf has allocated about a third of his portfolio to shorting stocks in hopes of profiting from falling stock prices.

David Kotok, chief investment officer at Cumberland Advisors in Sarasota, Fla., has overweighted his portfolio inUtilities Select SPDR (XLU) because it is less volatile than the stock market while offering a higher dividend yield.

Utility Yield Favored

XLU currently shows a yield 3.95% vs. 1.94% for SPY.

"They have been laggards a long time," Kotok said in an email. "They are underowned and defensive."

A part of last year's worst-performing S&P sector, XLU went from worst to first. It's rallied a robust 14% this year vs. 1.3% for the S&P. It returned only 13% last year, while SPY jumped 32%. XLU could be considered a value play as its price-to-book ratio of 1.6 is lower than SPY's 2.27, according to Morningstar. Both trade at a price-to-forward earnings ratio of 16.

Kotok has also overweighted energy, which he expects to do for years, because of the U.S. shale oil boom. His firm manages $2.2 billion in client assets.

Ron DeLegge, editor of ETFGuide.com, recommends that investors buy inverse ETFs, which rise in price when their underlying indexes fall, such asProShares Short QQQ (PSQ).



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , ETFs

Referenced Stocks: SPY , QQQ , DIA , EFA , EEM

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