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3 investments to sell in May -- but you don

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posted by today events alias todayevents1 on Tuesday 3rd of May 2016 07:35:32 PM

It’s May, and as flowers bloom and trees sprout green leaves, some stock market investors aren’t smelling the roses. Instead, they plan to “sell in May and go away.” My MarketWatch colleague Mark Hulbert cites many studies showing that by switching to cash on May Day and buying again on Halloween, you can slightly improve returns while significantly lowering risk over time. It doesn’t work every year, of course; nothing does. The last time this column wrote about it, we picked the wrong year. And for many people — including me, in my own retirement investing — selling 100% of your stock in May and buying it back in October is, well, just too cumbersome. But this year we’re lucky: The historically weak period for stocks coincides with what may be the tail end of a big rally that has pushed the Dow Jones Industrial Average and the S&P 500 to within a couple of percentage points of their May 2015 all-time highs. The averages have done this several times over the past 12 months. On April 20, the S&P 500 closed at 2,102, a mere 28 points shy of its closing peak. Some technical analysts say both the Dow and the S&P 500 must surpass their previous highs for the bull market to continue. Meanwhile, certain sectors and asset classes have posted outsized gains in the “risk-on” trade that emerged when the Federal Reserve kept short-term interest rates on hold after raising them once last December. So investors have a good opportunity to lighten up on sectors likely to be whipsawed by weak economies and further interest-rate increases, which will come, I’m convinced, if not as quickly as many of us expected. I would suggest selling, in whole or in part, allowing you to lock in some profits and reduce risk: 1. Energy Oil has soared an astounding 75%-80% from its January and February lows, when West Texas Intermediate crude closed in the mid-$20s a barrel. I believe that was a cyclical bottom for crude, and it’s about where it made its previous long-term low in 2008. Although U.S. drillers have cut production more rapidly than in the past — the Baker Hughes Rig Count continues to drop — don’t expect desperate oil-producing countries, especially Iran, to do the same. And I don’t see a big jump in global demand any time soon. So if you own oil stocks or energy or crude oil ETFs like Energy Select Sector SPDR or United States Oil Fund LP , this may be a good time to lighten up. I wouldn’t dump these entirely, because I think the worst of the oil bust is over, but banking some profits is good for the wallet and the soul. 2. High-yield bonds Two of the biggest ETFs specializing in U.S. corporate high-yield bonds — iShares iBoxx High Yield Corporate Bond and SPDR Barclays High Yield Bond — have outperformed the S&P 500 since the February lows. As crude oil rallies, investors apparently have gotten more optimistic that energy companies won’t default on the high-yield bonds that fueled their growth. But last week, Exxon Mobil Corp. lost the AAA credit rating from S&P it had held since the Great Depression. S&P said the energy giant had doubled its debt and relied too heavily on share buybacks. I realize every company is different, but if even the most financially stable oil company sees its debt downgraded, what does that mean for overleveraged drillers and shale producers? Last December, during a selloff in high-yield bonds, I said: “You shouldn’t sell now, but be prepared to reduce your holdings on future rallies.” Well, we’ve had the rally, so you should consider lightening up. 3. Stocks and bonds in emerging markets I’ve been pretty negative on these assets for quite a while. The bonds are vulnerable to a strong dollar and rising interest rates, as well as China’s slowing growth. And emerging markets stocks have been in a secular bear market for years. Since November 2011, the MSCI Emerging Markets ETF has lost 5% while the S&P 500 has gained 78% — an 80-plus percentage-point advantage for the boring U.S. benchmark. Yet EM bonds are up nicely and the stocks have rallied as much as 25%, as performance-chasing investors throw money at them once again. When will they ever learn? So if you still haven’t dumped EM bonds, now may be the time. At some point, the bear market in EM stocks will end, but the most widely available indexes are becoming more heavily exposed to China, a rigged market where growth is slowing. So, a word to the wise. Howard R. Gold is a MarketWatch columnist and founder and editor of GoldenEgg Investing, which offers exclusive market commentary and simple, low-cost, low-risk retirement investing plans.

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