Whether or not you caught the "Sell in May/Rotate to Defensives" trade this month, the good news is, you're not too late. With stocks paring losses these past three days, the long-awaited correction is looking a little thin now that we're down less than 3 percent for the month. And that's just fine with Paul Simon, chief investment officer of the Tactical Allocation Group, because he thinks there's more to come.
"It's time to take some money off the table," he says. "You'd be wise to look for a better entry point."
His concerns are not unique, but he says the cumulative weight of weaker economic data, sluggish housing, tepid auto sales and the overhang of QE2 ending creates "heightened uncertainty" and that justifies sticking with a now-crowded move towards defensive sectors such as health care/biotech (BBH), consumer staples (XLP), utilities (XLU), and food, beverage & tobacco (PBJ).
"All of the structural problems are still in place," Simon warns. "Can the economy really stand on its own two feet without a lot of government support? We keep coming back to the same answers, and it's 'no'."
One particular area of concern is that banks and financials are among the laggards. "Financials have to at least go along for the ride in a bull market. The fact that they haven't is very troublesome." But again, instead of bottom fishing, Simon says he's happier on the sidelines and has been pulling money out of things such as small- and mid-cap growth stocks, and into emerging markets (EEM), which he says "have the best fundamentals in the world and the highest growth."
Meanwhile, on our shores, the uncertainty surrounding the end of QE2 is, and will be, another headwind in June. Like many, Simon is unconvinced that what he calls "the Federal Reserve's great experiment" is worth it given that record spending has produced a subpar recovery.
So how should you play it? What's the cue to get back in and use some of that cash?
Simon says to wait for better valuations as the result of improved earnings and lower prices or opportunities of 'systemic selling' when everything gets sold off.
That's his game plan. What's yours? Let us know what you think below or in an email to email@example.com.