This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Sellers in May: What a surprise!

By Barry Randall

As I type this in early May, I'm left to reflect on April. The markets were weak in the month of "showers" and thus far in May, few "flowers" have bloomed. Oh, don't get me wrong; our companies are doing fine. But we're all a little damp from the market's unhappiness.

But take heart: the geniuses that run hedge funds are on the case. And since hedge funds, on average, have been dead wrong for about five years, there's no reason to believe they've suddenly developed a winning touch.

Note that in April, hedge funds collectively laid on a huge bet against small cap stocks. According to Bloomberg, both the equity and futures markets have seen large increases in short bets against the Russell 2000 Index (RUT), and by some measures, the negative sentiment has reached the highest levels in 10 years.

This matters to us because the Crabtree Technology portfolio does hold many positions in smaller cap stocks. And it has been rough sledding recently. And that's despite one of the best "earnings seasons" I've experienced as a professional investor.

While ridiculous momentum stocks like Tesla (TSLA), LinkedIn (LNKD) and FireEye (FEYE) have issued disappointing March quarter results, we've seen, in general, outstanding execution from our Crabtree holdings. But that hasn't always translated into upward price moves.

Take, for example, Crabtree holding ICON Plc. (ICLR). ICON reported its March quarter before the market open on April 30. And ICON didn't disappoint, registering what I call a 'triple crown: 1) beating earnings expectations; 2) substantially raising 2014 earnings guidance to 3) well above current earnings estimate consensus.

The result? As I type this eight days later, ICON shares are just over $38 per share, down slightly from their $38.70 close on April 29. It's easy to throw up your hands in frustration, but that's not our style. Plus, this kind of short term performance isn't necessarily representative of what's to come. For that, I'll defer to Josh Brown, who writes the Reformed Broker blog. On April 28, Mr. Brown wrote the following passage:

"Let's take a look at all the years in which the S&P 500 was flat (up or down less than 5 percent). It turns out that this has only occurred eleven times since 1956. Of those eleven years of flattish market performance, the average move (up or down) during the following year was a wild and wooly 18 percent. Only twice was the following year negative (1957 and 2008), on nine occasions the flat market was merely a speed bump on the way toward higher prices."

Perhaps 2015 will be wild and wooly in a good way. In the here and now, however, we need perspective to know that a bad month or two isn't the same as a bear market.

The key thing to remember about bear markets is that there are two things required: 1) an underlying condition; and 2) a trigger. In the financial crisis that began in 2007, the underlying condition was the huge and ultimately unknown amount of leverage in the global real estate market. But that alone wasn't the trigger. The trigger was oil prices reaching $140/bbl in the summer of 2007. Which drastically slowed consumer spending and confidence. And we all know what happened next.

Right now, it's hard to say if there's an underlying condition. The $17 trillion Fed balance sheet? Nobody seems that upset about it, especially now that the Fed is tapering its way out of quantitative easing. Political instability in Asia? The fact that CNN is still searching for flight MH370 and not traipsing around in Eastern Ukraine says all you need to know.

How about the incredible over-valuation of tech stocks? That would be true, except…that it's false. For example, technology continues to be the largest sector weight in the S&P 500 index at about 18%. But that's down from about 20% two years ago. Even after the bottle rocket market that was 2013. Just for perspective, tech was 35% of the S&P 500 index in the Spring of 2000.

Maybe, just maybe, this is about investors selling in May. I hear that happens a lot. Usually around the end of April. Sometimes later.

April was challenging for the Crabtree Technology portfolio, mostly for the reasons I've discussed. The Crabtree Technology portfolio declined -5.2% in the month, compared with a -3.9% loss for our Russell 2000 (RUT) benchmark and a 0.6% gain for the S&P 500 (SPX).

Our internal benchmark, the Merrill Lynch Technology 100 (MLO) declined -3.8% in April. The most widely held technology ETF, the State Street Global Advisors' Technology Select SPDR (XLK) rose 0.3% during April.

DISCLAIMER: The investments discussed are held in client accounts as of April 30, 2013. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable. Past performance is no guarantee of future results.

The post Sellers in May: What a surprise! appeared first on Smarter Investing

Covestor Ltd. is a registered investment advisor. Covestor licenses investment strategies from its Model Managers to establish investment models. The commentary here is provided as general and impersonal information and should not be construed as recommendations or advice. Information from Model Managers and third-party sources deemed to be reliable but not guaranteed. Past performance is no guarantee of future results. Transaction histories for Covestor models available upon request. Additional important disclosures available at http://site.covestor.com/help/disclosures. For information about Covestor and its services, go to http://covestor.com or contact Covestor Client Services at (866) 825-3005, x703.

Barry Randall

Barry Randall

Crabtree Asset Management invests in growing technology companies. Barry Randall is the firm's founder and Chief Investment Officer. He has …

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 16,987.51 -61.49 -0.36%
S&P 500 1,985.54 -11.91 -0.60%
NASDAQ 4,567.5980 -24.2080 -0.53%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs