What to Buy When Everyone is Selling Stocks

Good stocksSpring is supposed to be a time of renewal, birds chirping, frost melting. Good stuff like that. But it’s also the time when Wall Street’s bears wake from their winter slumber, stomachs growling.

Investors beware. Despite what’s shaping up to be a strong first-quarter earnings season for stocks, selling pressure is growing heading into the summer.

“The general rule is to be leery in April and May and then be an aggressive buyer when everyone is going to the beach or having a barbecue later this summer,” said Jeffrey Hirsch, editor-in-chief of the Stock Trader’s Almanac.

Historically, the worst six-month performance period for stocks is April through September, when the market has returned 1.3 percent, on average since 1945, according to Standard & Poor’s Equity Research ? hence the old Wall Street adage to “Sell in May and go away.”

The U.S. market’s best period, meanwhile, begins in October and ends in March with a 6.7 percent average return.

Those aren’t the only data points signaling a downturn. In fact, only four other times in the past century have equity valuations reached the height of current levels, according to a modified price-earnings ratio created by Yale University professor Robert Shiller.

The scary thing: In all four cases, big market declines soon followed.

Yet it’s worth noting that one experienced group of investors in particular hasn’t come down with the spring selling fever. Fund managers polled in the latest survey from Bank of America Merrill Lynch suggests that investment professionals are showing more risk tolerance, shrugging off the seasonal sell signals and much of the world’s pressing issues.

After all, there are still gains to be made during the six-month period starting in May. Investors have made money 65 percent of the time vs. a 77 percent frequency during the best stretch, according to S&P.

The Merrill report indicated that average cash balances fell to 3.7 percent of portfolio assets in April from 4.1 percent in March even as managers expressed growing concern about corporate profits. Of those polled, 19 percent said they believe company earnings will improve in the coming year, compared to 32 percent who said the same in March.

Michael Hartnett, Merrill’s chief global equity strategist, said “investors are reluctantly overweight equities. The combination of zero (percent) rates and rising inflation makes them fearful of bonds and cash.”

Such defensive areas are exactly where Hirsch says investors should be positioned. He recommended two bond exchange-traded funds from iShares: the 7-10 Year Treasury Bond Fund and the 3-7 Year Treasury Bond Fund, in which he owns a stake.

For those turned off by the paltry returns of a bond fund, Hirsch pointed to two bear-market funds, the Federated Prudent Bear Fund and Leuthold Weeden’s Grizzly Short Fund, to help navigate what he sees as a coming selloff. Both portfolios have taken a double-digit beating in the past year, in keeping with the rise in stock prices, but are poised to cash in if historical selling patterns take hold.

If betting against the market seems too risky, Hirsch urged investors to at least stick to the areas most likely to buck the trend. This time around, he said, the energy sector is the place to be. Hirsch said the pullback in nuclear-related stocks was overdone after the quake in Japan and that Market Vectors Nuclear Energy ETF and Global X Uranium ETF represent good opportunities.

Or go on the hunt for oil and gas stocks. If divining which issues in the sector are ready to rally is daunting, Hirsch said the First Trust ISE Revere Natural Gas Index Fund and the Energy Select Sector SPDR ETF are worth a closer look.

Standard & Poor’s Equity Research Chief Investment Strategist Sam Stovall said he believes investors should rotate out of high-risk sectors and into those that have proven, over time, to take market leadership in the summer months.

“When the going gets tough, the tough go eating, smoking and drinking,” Stovall said. “And if they overdo it, they end up at that doctor.”

With that pattern in mind, Stovall suggested that investors looking to stay in the market consider consumer staples and health care stocks. Alternately, a representative exchange-traded fund would cover the bases, such as iShares Dow Jones US Consumer Goods or First Trust Consumer Staples AlphaDEX, and iShares Dow Jones US Healthcare.

These two sectors have easily outperformed the market during Wall Street’s selling season, he said. Consumer staples have risen 5 percent on average during the May to October period dating back to 1990, while health care stocks have averaged a 4.8 percent gain. That compares to a 1.4 percent advance in the same period for the Standard & Poor’s 500 Index.

The worst-performing sectors ? consumer discretionary, industrials and materials ? have each lost ground over those months, with materials the hardest hit, down 2.3 percent.

Those sector returns flip around from November to April, when consumer discretionary and materials lead the way with an average six-month gain of more than 10 percent each. Since 1990, the S&P 500 has risen an average of 6.5 percent during those six months each year.

The “Sell in May” adage aside, Stovall said the short-term suntan and barbecue blip won’t stand in the way of a broader bull market this year.

“When you see the market blew off unrest in the Middle East, sovereign debt downgrades, the catastrophe in Japan, it’s clear that the market is looking ahead and seeing that the recovery is likely to pick up the pace,” Stovall said. “We are just digesting the most recent gains right now and the market needs this little breather.”

Source: McClatchy-Tribune Information Services.