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Sell in May and Enjoy Summer !

It has been while since I wrote my blog. Got busy ! Now that April has wrapped up and May is about to start, time to be cautious. Markets has been on a tear crossing 12800 (DOW), Nasdaq is at 10 year high.

So is it time to "Sell in May and Enjoy the gains in Summer Time ? " I think so.
Best period for stock markets (Nov to Apr) ended today. There may be another 5% upside remaining for 2011 and most likely this would come towards end of year. In between there are quite a few headwinds markets are facing. Here are few of them to list:

  • Noise around US debt limit. In two weeks, Congress needs to act on raising debt limit and given drama around budget, there would be quite a bit of drama before debt limit is raised. Markets don't like drama !
  • Talks of Greek debt restructuring ! Greek debt is trading at yields not seen even during last May when Greece was about to default.
  • End of QE II - while Fed had given better news than markets were expecting, QEII is ending in June. So cheap money would start going out of markets at some time in Summer
  • Inflation - everybody is talking about impending inflation and given oil, gold, silver prices, it is here already. It's just that housing and unemployment problems is keeping a lid on inflation for now
  • Valuations - With markets in multi-year highs, even though earnings are good, topline growth has started slowing down. So at least in short-term stock valuations are getting ahead of earnings momentum
  • Geo-political issues - Middle-east political issues, post-earthquake recovery issues in Japan
So with so many headwinds, markets would see correction and may come down closer to 12000 over summer. So why to risk the gains made in recent weeks for another 5% upside from here. So my recommendation is cash out your gains and enjoy summer (and summer movies) !

Cheers !

/Shyam

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