STRATEGIES

Mantras can be prophetic until they aren't, and those who "sold in May" have already lost out on solid gains. However, several sectors continue to look good for buying, writes MoneyShow's Tom Aspray.

The financial markets finished the week with solid gains, as the ECB and Fed’s action was better than the markets expected. This had been a primary concern of many and had kept them out of stocks.

The Spyder Trust (SPY) closed up 1.9%, while the SPDR Diamond Trust (DIA) gained 2.1%. Even more impressive was the Russell 2000, as the iShares Russell 2000 Index (IWM) was up 2.6%.

Technology stocks had been leading the charge for the past month, but last week the Nasdaq-100-tracking PowerShares QQQ Trust (QQQ) as was up only 1%.

As I noted last Friday, there has been significant improvement in the technical picture this week, as the market internals improved sharply. Therefore, the coming correction should present a buying opportunity for higher prices into the end of the year.

Last spring, the media was focused on "sell in May,” which over the past few years has been an increasingly well-known mantra. As it has become more popular, many analysts have correctly pointed out the weaknesses in this approach. Nevertheless, after 2010 and 2011, many likely did sell in May, which they are likely now regretting.

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These charts show what profits may have been lost for those who either sold at the end of April or at the end of May but have not reinvested. Someone who sold their position in the Spyder Trust (SPY) at the end of April would have given up around 5.4% in profits.

Those that held through May and sold at the end of the month would have done even worse, as since June 1 the SPY has gained over 12%. Experienced investors know that looking at each position is a better strategy than taking an all-in or all-out approach. Of course, stocks could drop back to the May lows but that does not look likely now.

In May’s article “Is This the Year to Buy in May? I looked at five different election years and concluded that buying in May of an election year did often work, unlike other years.

For example, in 1936, stocks rallied over 18% from the May lows until the end of the year. This is an especially interesting year as the stock market and economy were recovering from the depression.

A very interesting NPR article, “When a Turn Toward Austerity Turned to Disaster," explains that the drop in unemployment from 22% to under 10% and high deficits prompted an austerity push by FDR. As they noted: “Over two years, FDR slashed government spending 17%.”

From the March 1937 high of 192.77, the Dow Industrials dropped to a low in March 1938 of 97.46. This was a decline of 49.4%, and was accompanied by a sharp rise in unemployment and plunging commodity prices. Ben Bernanke is obviously aware of this history, and probably hopes that last week’s action will help avert a similar fate.

There were several other good election years, with 1982 being the standout. From the mid-May lows, the Dow was up 32% by the end of the year.

NEXT: Now, a Reason for Caution

Tickers Mentioned: SPY, DIA, QQQ, IWM, GLD