“Sell in May and Go Away” is the common wisdom of equity traders, and after 36 Summers in this industry, I agree that for traders, this is useful advice. My desire is to emulate the success of value investors who are nearly all long term position holders, so selling in May, just because the Summer is often challenging for stock valuations, does not carry much weight with me. This year was a little different. Oil prices have been rocketing, the dollar collapsing and the political climate in Washington is unlikely to tolerate further monetary stimulus by our Federal Reserve bank. So beginning about a month ago, I became less tolerant of client equity holdings that failed to hold important technical support (yes, I use charts too). We reduced a long time holding of a forest products company and a major player in software, thus raising client cash from a level of virtually zero to about 6% of portfolio values.
“Sell in May and Go Away” is the common wisdom of equity traders, and after 36 Summers in this industry, I agree that for traders, this is useful advice. My desire is to emulate the success of value investors who are nearly all long term position holders, so selling in May, just because the Summer is often challenging for stock valuations, does not carry much weight with me. This year was a little different. Oil prices have been rocketing, the dollar collapsing and the political climate in Washington is unlikely to tolerate further monetary stimulus by our Federal Reserve bank. So beginning about a month ago, I became less tolerant of client equity holdings that failed to hold important technical support (yes, I use charts too). We reduced a long time holding of a forest products company and a major player in software, thus raising client cash from a level of virtually zero to about 6% of portfolio values.
In light of the market’s vicious sell off this week, this cautionary action may seem too little. Yet our clients already hold a high allocation to fixed income (bonds and preferred stock), based on my stubborn refusal to follow the oft repeated warnings of a coming collapse for the bond market. We have provisioned client portfolios with income yields ranging from 6% to 10%, so it is easy to resist abandoning these cash cows for the volatility of equities. This means our exposure to stocks has remained below its level of 2007, prior to the last market Crash. Further, most of our common stock exposure is in the form of defensive companies and those paying high dividends. These can usually be counted upon to perform better when the overall market sells off.
Yet, I’m not seeing convincing evidence that we are going a lot lower. My suspicion is that the market will hold above the all important 200 day moving average while backing and filling. Then, I hope, another rally to new highs. My sense is that while momentum is the US economy is waning, this may be only a temporary slowdown. Unprecedented fiscal stimulus continues to course through the economy. If energy prices decline, as they have been doing in recent days, and gasoline at the pump falls below $3.00 a gallon, consumer confidence, to say nothing of spendable income should improve, and the recovery may then gain its footing. But the jury is out and our current defensive positioning is, I feel appropriate for the current situation.
