Where to go if you ‘sell in May and go away’

By Polya Lesova, MarketWatch

NEW YORK (MarketWatch) — After a blowout first quarter, investors may be feeling a sense of deja vu — both 2010 and 2011 saw an early rally in the stock market that was followed by a dramatic downturn beginning in the spring. As the market’s historically worst six months of the year draw closer, many on Wall Street see another stock slide looming.

“I do believe that we’ve set ourselves up for another seasonal downturn,” said Jeffrey Hirsch, editor-in-chief of Stock Trader’s Almanac. May through October is typically the worst six-month stretch for stocks. Without the over-arching influence of the financial crisis, seasonal patterns are back in play, according Hirsch. “We’re getting defensive and cautious,” he said. ”There are really no sectors that begin a bullish move right here.” The rally so far has certainly been impressive. The S&P 500 index (SNC:SPX) gained 12% from January through March, posting its best first quarter since 1998. The Dow Jones Industrial Average (DJI:DJIA) rose 8% in the first quarter; among its components, Bank of America Corp. (NYSE:BAC) surged 72%, J.P. Morgan Chase & Co. (NYSE:JPM) gained 38% and Microsoft Corp. (NASDAQ:MSFT) rose 24%.

the pace of economic expansion in China.S.S. the euro-zone debt crisis and the U. This year. They included the end of the Federal Reserve’s second round of quantitative easing. but a series of shocks triggered a selloff in May that lasted for months.S. Equities had also started 2011 on a strong note. Other risks are potential disappointment in U. “We believe the market is overbought and this year’s advance is very similar to last year’s. And all this comes as the U. with the S&P 500 losing nearly 20% from a high in May to a low in October. Moreover.” Samana said.Click to Play Global markets fearing end of stimulus Spain found itself in the market's crosshairs as mounting concerns over the economy sparked a sharp slide in the country's bonds. high oil prices. but Spain’s severe recession and rising bond yields are a reminder that the euro crisis is far from decisively resolved. Oil prices are rising and could spike further if the West undertakes a military strike against Iran. is slowing down. investors sold stocks. erasing the effect of the ECB's cash injection. Sameer Samana. many of the issues that preoccupied investors in 2011 are still in play. economic data and corporate earnings. Spooked. The end of the Fed’s Operation Twist program in June is approaching. wrote in a recent report that investors should take profits since the easy money has probably been made and the bulk of the rally is over. one of the world’s most important growth engines. credit rating downgrade. . international investment strategist at Wells Fargo Advisors. Liquidity operations by the European Central Bank and the agreement on a second bailout for Greece have eased tensions. presidential election looms in November.

“What we do on the defensive side is pick up some bond positions and some shorts. Rosenberg’s firm has holdings in some Canadian banks — Royal Bank of Canada (TOR:CA:RY) .” In the financial sector. a Canadian mortgage originator. and companies with strong balance sheets. Bank of Nova Scotia (TOR:CA:BNS) and Toronto-Dominion Bank (TOR:CA:TD) — and in First National Financial Corp. He pointed to long-term Treasury ETFs. (NYSE:COF) . earnings visibility and dividend growth. financials “I’d say be wary of the consumer cyclicals and focus on defensive sectors [such as healthcare and staples]. The Technology Select Sector SPDR Fund (NAR:XLK) — which offers broad exposure to the tech sector — has gained around 18% this year. as well as short-selling stocks via exchange-traded funds. “Housing stocks have already priced in a housing recovery. Back to treasurys? Hirsch of Stock Trader’s Almanac noted that potential strategies include gaining exposure to U. while in the U. respectively.S. “You want to be very selective within the financials.” he said. Financials are among the best performing sectors on the S&P 500 this year. (TOR:CA:FN) . it owns shares in J. what should investors do to prepare? Beware cyclicals. . Among defensive sectors.” Hirsch said. such as iShares Barclays 7-10 Year Treasury Bond Fund (NAR:IEF) and iShares Barclays 20+ Year Treasury Bond Fund (NAR:TLT) . along with information technology and consumer discretionary. while the Financial Select Sector SPDR (NAR:XLF) is up nearly 20% in the same period.P. government bonds — typically seen as a safe haven. the Health Care Select Sector SPDR Fund (NAR:XLV) and Consumer Staples Select Sector SPDR Fund (NAR:XLP) are up 8% and almost 5% year-to-date. with many strategists expecting some type of market pullback. chief economist and strategist at investment firm Gluskin Sheff.” said David Rosenberg.So.S. Morgan (NYSE:JPM) and Capital One Financial Corp.

” Also. but food prices are down.” Kleintop wrote in a research report.” Some strategists such as LPL Financial’s Jeffrey Kleintop think that even if there is a decline in the stock market.6% global growth (compared to a consensus forecast of 3. macroeconomic expectations are lower this year. believes meaningful risks face investors and various catalysts could set off a stock slide.6% growth around this time last year). And Keith Wade. Hugh Johnson.” he said. which should help to temper global recession fears evident during the past two years’ spring slides. “My hope is that the stock market will correct 6%. but I do think that the bullishness of investors will be tested much the way it was severely tested last year. with economists looking for 2.As for the AdvisorShares Active Bear ETF (NAR:HDGE) . chairman of Hugh Johnson Advisors. I’m not convinced that we’ve seen the top of this rally here. which seeks to make money by short-selling stocks. oil prices are up. housing is showing signs of improvement. chief economist at asset management firm Schroders. “Second. it may be less steep than in the previous two years due to some mitigating factors. Hirsch said: “We’re not in that yet. “First. pointed out that in contrast to 2011. and that 2013 will be a good year. which may partially explain the rise in consumer sentiment. but we’re looking for a point to get in. not 20%. but we may get one more push. It definitely looks like the market is beginning to crack. central banks are now cutting rather than hiking rates.  WSJWSJMarketWatchMarketWatchFacebookTwitterBarron'sBarron'sSmartMon eySmartMoneyAllThingsDigitalAllThingsDigitalWSJ LiveWSJ LiveFINSFINSMoreFactivaBigChartsVirtual Stock ExchangeFinancial NewsWSJ AsiaWSJ India WSJ China chinese edition WSJ Japan japanese edition o o WSJ EuropeWSJ Deutschland WSJ Americasen Español em Português WSJ ClassifiedsWSJ RadioWSJ Wine .