According to the 2006
Stock Trader's Almanac
, $10,000 invested in the
Dow Jones Industrial Average
on Nov. 1 and sold on April 30 of every year going back to 1950 would net the lucky investor nearly $490,000 for an average 7.9% return. Meanwhile, $10,000 invested and sold during the opposite time frame (May 1 to Oct. 31) would have
the investor $502. So much for the idea that stocks always go up over the long term.
last column, I credited the axiom "Sell in May and go away" for inspiring me to look for a short candidate, settling on
Some market participants say these kinds of patterns based on calendars or cycles are a bunch of baloney. And like Henry Donnelly in
Weird Science, they don't stand for baloney. They are more concerned with what the market is telling them now, as opposed to what happened one spring during the Eisenhower administration.
"What's most important is the actual market action. Market history can be a useful tool as a background," says Mike Hurley, chief technical strategist with M.S. Howells & Co. "But it's just a background."
But for those who believe the theory does have merit, or who simply want to assume a more defensive posture, I offer the following ideas.
Regardless of the calendar, interest rates appear to be headed higher. John Roque, a technical analyst with Natexis Bleichroeder, expects the yield on the 10-year Treasury note to hit 6%. On Thursday, the benchmark note's yield rose above 5% for the first time since mid-2002, settling at 5.05%.
A further spike in rates has significant implications for rate-sensitive sectors such as utilities and precious metals.
Utility companies often have a lot of variable-rate debt, so as interest rates rise, their interest expense increases. Furthermore the stocks are attractive to income-oriented investors. But when rates rise, investors can find other income-producing assets with lower risk.
I believe the utilities sector could be in for as much as a 10% decline. Aggressive investors who share that belief can consider shorting the
Utilities Select Sector SPDR
. Keep in mind that the ETF yields over 3%, and that means shorts will have to pony up those dividends as they are declared.
Investors who are uncomfortable with shorting or who prefer a vehicle that is directly correlated with interest rates have a few mutual funds to choose from.
Rydex Juno Investor is inversely correlated to the 30-year Treasury bond. Through April 12, the fund has returned 10.7% year to date and 8.2% over the past year.
Investors with more conviction can juice their returns with
ProFunds Rising Rates Opportunity, which I own. Like Rydex's Juno, the ProFunds offering is also inversely correlated to the 30-year, but with an extra 25% leverage, so it's a souped-up version of Juno. The ProFunds offering has returned 13.7% year to date and 9.6% over the past year. However, the three-year annualized return is negative 3.5% vs. Rydex Juno's decline of 2.2%.
Gold on the Move
Since the early 1970s when gold was no longer fixed in price, the yellow metal has generally moved in the same direction as interest rates. If you're not among the "one and done" crowd, an investment in gold may be a prudent way to hedge your portfolio.
streetTRACKS Gold Shares
exchange-traded fund is a good way of tracking the price of gold. The ETF trades at one-tenth the price of gold and essentially moves in direct correlation with the metal's price.
For investors who wish to be a bit more diversified,
USAA Precious Metals and Minerals , which I own, is a low-cost and fairly well-balanced choice. According to Morningstar, roughly 70% of the fund's assets are in gold stocks, while 16% are in platinum producers. The rest comprise silver, diamond and base metal companies. The expense ratio is a reasonable 1.23%, and fund manager Mark Johnson has been at the helm for 12 years.
U.S. Global Investors World Precious Minerals is a choice for more aggressive investors as this fund focuses on smaller and riskier miners. According to Morningstar, this fund had the second-best performance of all funds in the first quarter, with an impressive 34.5% return. It is somewhat rare that mutual funds can maintain that level of outperformance. Nevertheless, if you believe that in the near future we'll consider $600 gold cheap, the fund should be able to post some solid gains to offset the negative effects of higher interest rates.
Other Ways to Sell the Market
If you're looking to get short the market or simply want a hedge while you're relaxing at the beach this summer, there are several easy ways to go about it. The proliferation of ETFs means that you can short the broad market by using
S&P Depositary Receipts 500 Trust
, which tracks the
Nasdaq 100 Trust Shares
iShares Russell 2000 Index
Of course, investors can also choose from the myriad of sector ETFs such as the utilities ETF mentioned above, or something like the
As noted above, not everyone is comfortable with short positions. Luckily, there are mutual funds you can buy that do the shorting for you. Similar to the inverse bond funds, Rydex and ProFunds offer mutual funds that are designed to inversely perform broad market averages and specific sectors.
Investors with $25,000 or more to invest are probably best off with the lowest-cost provider in the group,
Rydex Arktos or
Rydex Ursa. Arktos is negatively correlated to the Nasdaq 100 and Ursa to the S&P 500.
If you don't want to commit that much capital, the
Bear ProFund will also offer you inverse exposure to the S&P 500. The
Grizzly Short Fund from the Leuthold fund family shorts individual stocks as opposed to being tied to an index. The Grizzly Short Fund has a higher expense ratio than some of the index-related funds but had an impressive yield of 3.3% over the past 12 months. However, it has underperformed Arktos and Ursa over the past one- and three-year periods.
If you want to get sector-specific, ProFunds offers several inverse funds, such as
Short Real Estate, which corresponds to the Dow Jones U.S. Real Estate Index.
And of course, there's always cash. Several banks are offering yields over 4.5% on money market accounts. According to Bankrate.com, HSBCdirect.com is offering a rate of 4.7%, while American Partners Bank of Bethesda, Md., sports a 4.6% rate.
So if you decide to sell in May, these ideas should help you feel relaxed enough to not only go away but to actually get away from the cell, Blackberry and WiFi -- now that's something worth its weight in gold.
In keeping with TSC's editorial policy, Lichtenfeld doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships.
Marc Lichtenfeld was previously an analyst at Avalon Research Group and The Weiss Group and a trader at Carlin Equities. He holds NASD 86,87, 7 and 63 licenses. His prior journalism experience includes being a reporter/anchor for On24 in San Francisco and a managing editor of InvestorsObserver, a personal finance Web site. He is a graduate of the State University of New York at Albany. He appreciates your feedback;
to send him an email.