Is the old Wall Street adage "Sell in May and Go Away" just an old wives' tale? Or is there indeed a reason to take your money out of the market and run in May, only to return the stock market later in the year? Let's check it out -- and also look at how I'm playing things this month.
Going back to 1950 or so, the Dow Jones Industrial Average
There are several possible explanations for this phenomenon that appear to make sense. For instance, the U.S. government's fiscal year ends on Sept. 30 each year, with a new one beginning each Oct. 1.
I can tell you from personal experience in the U.S. military that there's no money for any government spending as that fiscal year winds down. In fact, due to haggling at the congressional level, the money often doesn't quite start flowing on Oct. 1, either.
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What that means is that the military's orders for big-ticket defense items slow down around then, but usually pick up again by November. It's the same story with U.S. government hiring.
Then comes the "Santa Claus Rally," when markets historically do well right around Christmas as they see end-of-year fund inflows and people investing annual bonuses.
Next comes Tax Day right around April 15, when joyful taxpayers who have unwittingly lent the government their hard-earned dough at 0% interest finally get some of their money back in the form of tax refunds. Some of that winds up in the stock market -- but after that, the inflows can run sort of dry (at least in theory).
Of course, the "Sell in May and Go Away" theory doesn't always work in a given year, and I don't practice this six-months-on/six-months-off strategy myself.
Now, I'm at extremely elevated cash levels as we begin the new month. Those who read my columns regularly know that I've been stressing the need to get to higher cash levels since January.
I also recently grabbed the opportunity when General Electric (GE) briefly rallied following a better-than-expected earnings report to get out of my large GE long and all of my related hedges. Fortunately, i do so at a small net profit.
However, this took my cash position to well in excess of 40% of my portfolio. I've been trying ever since to put some of that back to work in baby steps.
Here's some of what's on my book as the new month starts:
I'm still long a bevy of tech names, particularly the semiconductors. But with the exception of a full-sized position in Intel (INTC) , most of the rest of my tech stakes are down to 10% to 20% of their original size. That would include some of my favorite semi stocks -- such as Action Alerts PLUS Nvidia (NVDA) and Micron (MU) -- as well as chip-component suppliers like Lam Research (LRCX) , and KLA-Tencor (KLAC) . (Although the latter is now on a short leash.)
I'm still long the defense arena, and I expect the sector to rebound following earnings season given that military budgets are fat worldwide this year. (Signs of peace between North and South Korea don't help my positions, but I'll take take peace over a few bucks.)
I'm up big in Lockheed Martin (LMT) and Action Alerts PLUS holding Raytheon (RTN) despite their recent declines, while Kratos Defense (KTOS) continues to be one of my portfolio's winners as well. However, my stakes in General Dynamics (GD) , and Northrop Grumman (NOC) might require a little management. Fortunately, those two are my smallest positions in the defense space.
Banks have underperformed since releasing what seemed for the most part like solid earnings some two weeks ago.
I remain long Action Alerts PLUS holdings Citigroup (C) , JPMorgan Chase (JPM) and Goldman Sachs (GS) , although I took a profit (fortunately) on most of my GS position prior to the sector's recent sell-off. I've also taken steps to manage both my C and JPM stakes into a better place.
Shopping the Discount Rack
I've initiated some long positions in stocks that got damaged during the year's first few months.
For instance, I re-entered Home Depot (HD) and Walt Disney Co. (DIS) . I also recently bought McDonald's (MCD) , but sold on strength on Monday, although I want to buy it back on any weakness. I also initiated new longs in Action Alerts PLUS holding DowDuPont (DWDP) and Altria (MO) .
All of these names are way off of their peaks, but they also have a long way to fall should calamity strike. Besides, I happen like lawn-care products (Home Depot), Quarter Pounders (McDonald's) and Star Wars movies (Disney) -- not to mention the direction that Disney-owned ESPN seems to be going.
Still, most of my short positions happen to be in options. I won't list them all here because there are just too many to go over, but if you've ever wondered how I manage lousy positions and get out alive (as I did with GE), I do so with options.
It's all about understanding risk and deciding where you're willing to own an option to reduce your net basis and/or increase your potential return on investment. It's not easy, but it's not rocket science, either. Everyone can learn how to defend themselves.