April was far from fun for Wall Street. May is already shaping up as a nervous month at best, reminding a lot of investors of this can be a great time of year to sell and forget about stocks for awhile.
I have to admit that I never sell in May or any other time. I never want to “go away.”
That’s even more true this year, when other asset classes aren’t offering a lot of shelter. Traditionally, you could bail out on stocks, park your money in bonds and clip coupons until you were ready to come back.
Clip Treasury coupons today and you’re probably going to end up less wealthy than when you started.
The Fed expects inflation to run above 4% through the rest of this year at least. Long-term yields are tracking at least a full percentage point lower.
Say you park in bonds for the next six months. Unless you find someone eager to pay you more for that paper when you want to cash out, you’re guaranteeing a loss in terms of purchasing power.
And it’s a fairly big assumption that you’ll even find a buyer willing to pay you more for your bonds. Remember, the Fed is no longer pumping billions of dollars a month into artificially propping up Treasury demand.
For your bonds to be worth more when you want to sell, the stock market needs to get scary enough to drive smart money into what is essentially a losing proposition. They need to be convinced that stocks are going to do so badly that they’re willing to accept giving up a little wealth to inflation.
Maybe you’re at a point where you want to lock in the lesser of two evils. I’m not convinced that the right stock strategy is guaranteed to rack up bigger losses over the course of the summer.
Sure, if you’re limited to buying and holding index funds or the most popular stocks Silicon Valley has to offer, it could be a gloomy couple of months. The Fed looks relentless and sentiment is cracking.
But I’m not a buy and hold type. Nothing prevents us from buying short-term dips and cashing out a few percentage points higher . . . even a secular bear market generates plenty of these opportunities.
Keep The Money Moving
Just this morning, my High Octane Trader subscribers cashed a 17% overnight win. We bought Merck (MRK) call options after that ultra-defensive stock started showing signs of shaking off the Fed flu.
At the time, MRK was down 3% in the course of a few days. This morning, it recovered, taking our calls along with it.
While it doesn’t work quite so well every time, our cash keeps working. The wins stack up higher than the losses, leaving us with net progress toward our goals.
I don’t want to brag, but I want to motivate you. YTD the S&P 500 is down close to 14% now. That’s why buy-and-hold investors are feeling more than a little frustrated.
Trading the options around that slide has delivered average net gains close to 9% . . . adding up all the profits and subtracting all the losses, nothing tricky about the math.
You don’t have to be an option trader. But when the tide stops rising beneath Wall Street as a whole, you need to get selective and nimble in order to squeeze positive returns out of the market.
I like to think talent and a little luck can make a difference. The alternative is locking in a loss with bonds or staring down what could be a bumpy season for buy-and-hold strategies.
But with that said, stocks are often volatile and always surprising. Their power revolves around our lack of ability to predict where they’re headed.
Right now, the broad market seems poised to go down before it has much hope of coming back up. However, as I’ve discovered, smart money isn’t anticipating an extreme crash scenario ahead.
The “down” might chew up another 9-10% between now and September. That hurts, but the options market is equally open to a 9-10% rally over the exact same timeframe.
In effect, Wall Street is flipping a coin. Heads, we come back strong and everyone who sells now looks a little foolish. Tails, buy-and-hold types would be better off in bonds and taking a smaller haircut.
I like the odds to run a lot better than 50-50, which is another reason why I’m especially focused on individual stock and options positions right now. While the market as a whole is an open question, some stocks and sectors are a much better bet.
Energy, not e-commerce. Consumer staples, not computers. Banks . . . but only on the right swing. It’s really that simple.
Don’t get ambitious. Don’t get greedy waiting for a windfall. Take a few percentage points and then repeat.
Yes, There Are Sweet Spots
I know it looks a little apocalyptic out there but there are still over 100 stocks in the S&P 500 alone that are up 5% or more YTD. Start with that strong core.
If you’re up 5% in any four-month period, you’ve got what it takes to beat the broad market in the long haul. On average, the S&P 500 takes a full year to climb 10-11% . . . and those are the good years, needless to say.
Earn just 5% and do it three times in a 12-month period and you’re going to beat the buy-and-hold types over time, provided of course that you can do it consistently. Compound your “edge” and you can see how the gains stack.
So where is that core? Defense. Oil. Berkshire Hathaway (BRK), which is buying oil as fast as Warren Buffett can sign the checks. ExxonMobil (XOM) and Chevron (CVX). Conoco (COP).
Big Pharma . . . Eli Lilly (LLY) and my good friend MRK. Abbvie (ABBV) and Amgen (AMGN). Bristol-Myers Squibb (BMY).
Consumer stocks. Think comfort food. I’ve talked recently about Coca-Cola (KO). Kraft Heinz (KHC). Add Altria (MO) for nervous times, if you can handle making money on a smoker stock.
These names are only the biggest on my list. Most pay dividends, so you’ll get a bond-like return while you wait for the stocks to do the heavy lifting behind the scenes.
That’s important too. A lot of really great companies reward you for buying and holding by paying you cash back, just like Treasury debt but often at a much more compelling yield.
The Treasury can’t pay more than 3% a year right now without global markets losing their cool. XOM pays closer to 4% and has the ability to raise its dividend as oil prices remain strong. MO pays almost 7% a year.
Don’t sell stocks and go away for the dubious safety of bonds. Sell growth stocks if you’ve lost your nerve . . . and seek yields that can at least keep up with inflation until you decide it’s safe to come out.
One Last Thing
This May might be stormy but I was just looking at the numbers and there’s nothing magical about this time of year that rewards people who head for the sidelines.
Across the last decade, the May through October period has contributed a net positive return of 5.7% on average. Only once (2015) did it make sense to dump stocks in this season, and even then the drawdown wasn’t even 1 percentage point.
Go back to 1950, and the math isn’t extremely bearish either. Maybe this is the worst period of the year, but it still delivered a positive average return of roughly 2 percentage points . . . and was only a losing period 35% of the time.
Again, this year might be one of the bad ones. But don’t blame statistics if you’re ready for a vacation. And if you can’t help but keep an eye on the market, stay in the game . . . keep trading!