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Sell in May and Go Where? Preparing for the Market’s Slow Season

Sell in May and Go Where? Preparing for the Market’s Slow Season

Had you adhered to the old adage "sell in May and go away" for the past three years, you would have not only avoided a lot pain, but you would have likely outperformed the benchmarks, as well. This as the springs of 2010, 2011 and 2012 each marked the starting point for sell-offs that would shave anywhere from 9% to 19% off of the S&P 500 (^GSPC) in just a matter of months.

In the case of Jeff Hirsch, the editor-in-chief at the Stock Trader's Almanac, it's not just about going away from the stock market, he says investors need to have a strategy that will carry them through until the fall.

"When you come around to the end of the best six months, e.g. April, and the market is up as it is, we start to get defensive," Hirsch says in the attached video. By putting what he calls "the prevent-D on the field," he implements a host of portfolio changes, such as tightening up stop-loss levels to bring them closer to the appreciated value of assets; limiting the new purchase of positions; undergoing simple profit-taking in winners and culling losers; and looking for possible short ideas and some asset shifting into bonds.

Historically, since the 1950s, Hirsch says the longer-term "sell in May" results are also compelling, but never more so than in the past three years. In 2010, for example, the high watermark set in late April did not get permanently eclipsed until December — and then, only by about 3%. In 2011, the high of the year was hit on May 2 after the S&P 500 had gained 9%. But over the next five months, stocks fell 20% and would ultimately finish the year flat, which was still 8% below where they were eight months before. And then again, in 2012, a searing hot first quarter saw a high set in April, followed by a sell-off and five unproductive months while the market got back to even.

Like most investors, Hirsch is looking at the current pace and level of the market with a healthy degree of skepticism and an equal amount of nervousness. In fact, a recent note characterized the market as ''psychologically conflicted, fundamentally mixed, technically near resistance and seasonally bearish."

Of course, the sell in May strategy only works if you remember to buy back in again, Hirsch says, in order to take advantage of "the big move from November through April."