Instead of blathering on about the market last week or providing some vague counsel, you are in for a treat. We are providing you with a strategy and tactics to deal with the market from now through the first week of June. We start with some great buys this week, followed by some sells and sector buys, and ending with profit-taking in June.  As a bonus, we even provide guidance as to how to play sector rotation and seasonality all the way through August.

April 21, 2013
Volume 3, Number 42

The Goldman Guide

A 6-Week Trading System

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We live in the now. As a result, we spend too much time worrying about how we are going to trade based on news of the day. We view this approach as tactical rather than strategic thinking. While both methods are worthwhile and one cannot do without the other, the strategic approach seems to have been forgotten altogether. Big mistake.
With that in mind, today we will provide you with a primer on what you need to do to play the market today, next month, and early June. View it as a 6-week system, if you will that combines seasonality with sector rotation and tactical use of stock movements.

Week of April 22nd:

This week’s stock market action is likely to be the epitome of a tactical approach to the stock market. On one side, the cover of Barron’s touts Dow 16,000 and a bunch of bullish money managers. On the other side, only 27% interviewed for the weekly AAII Consumer Survey (retail investors) are bullish. Earnings have not been so great, growth is slowing, and gold is collapsing. Yet, this week we have a bunch of key earnings reports, including Apple (NASDAQ—AAPL) after he close on Tuesday, which could be a real barometer for the stock market. 

What to do: The market will be on pins and needles so you better be prepared to be nimble on sales and buys. It may take too much to get the Street optimistic about AAPL again anytime soon, so tech remains an area to avoid, for the most part. Stick with stocks under real accumulation and that are working.

For example, last week in these pages we gave you 2 great ones that did very well hitting new highs by week’s end despite the lousy market.   Linktone (NASDAQ—LTON—$3.35) hit $3.47, and our profile price was $3.04. It has room to go much higher. Rite Aid (NYSE—RAD—$2.46) hit $2.48, up from our $2.31 profile price and looks like it could go to 3.00.

First 2 weeks of May

Mayday!
May 1st is a holiday in many European countries and is referred to as Lei Day in Hawaii where the island’s    culture is celebrated.  For our purposes, May Day is really Mayday, as in a distress signal. After all, the old adage is “Sell in May and Go Away.” This is the second half of what some refer to as The Halloween Indicator which proffers that stocks perform best from November through April.  A number of “back testing” has been implemented looking at 10, 20, 40, 50, and 60 year periods and in most cases, the majority of gains are in fact borne from November through April and losses in May through October.

We should note, however, that since 1950, May has actually experienced an average return of 0.05% and was up 35 times.  Nonetheless, the past 3 years have been brutal, declining by an average of 5.4%. We expect that recent trends will likely continue. Take profits where you can but be ready to buy some beaten down stocks in certain sectors. (See below.)

May is also chock full of key economic reports, including auto sales on May 1st, along with PPI and CPI updates mid-month. It is not uncommon that these last two index reports prompt sharp moves in either direction. Finally, GDP for the most recent quarter is announced at the end of the month.  This announcement gives us a glimpse into what June may bring, stock market-wise.

So, Buy These Sectors in the first half of the month…
Certain retail stocks, such as stocks related to the automotive sector, leisure stocks and casual dining equities tend to be good performers in May, while technology usually begins its seasonal, protracted decline. So, if you are taking profits or selling losers, focus on these spaces.

Last Half of May
The second half of May could be an opportunity to sell some stocks you just bought for a quick profit, as the May doldrums may start to hit, after rising in anticipation of the start of the summer season, where they tend to get a little pick-up. We are not talking major returns here, but on a cumulative and combined basis, you could do a hell of a lot worse. Moreover, you are probably going to want to prepare to be liquid for       another series of trades heading into the first week of June. 

Beginning in the latter part of May, anti-cancer biotech stocks will be the place to be. 
The annual American Society of Clinical Oncology (ASCO) meets in early June each year. This is a major conference for oncology companies and in particular oncology-related stocks. Beginning in mid-May, word will begin to spread as to which companies will be attending and more importantly which ones will be presenting at this event. Anti-cancer stocks tend to move sharply higher in the 2-3 weeks prior to the conference, and sell-off in the weeks following the event. This presents a great trading opportunity for those looking to potentially turn a quick profit.

Plan of Action: Buy biotechs in late May, Sell them in early June

Bonus Plan for the Summer:
At this point you are probably asking yourself, “after I sell, what do I do?”

The answer is simple: With few exceptions, trade out of short term positions and get liquid wherever you can. Summer will likely not provide much until we reach the 2nd or 3rd week of July. Then, the real homework begins. You must follow tech companies to see what kind of 2H13 is in store, along with the likely downgraded forecasts. Although tech could very likely have a tough May-August, be prepared for intermittent upward surprises to throw you off your game.

In the meantime, retail stocks should be avoided, as should materials and industrials. Stick again with the winners and those with rising volumes through early-mid-August.

As you get to the beginning of August, dabble in retail stocks, which should benefit from back-to-school purchases, as would consumer tech as well. Some of the tech companies will seasonally about to turn the corner and valuations will begin to creep up.

Until next week….