Bears Bears Bears

Bears of May have come to play

5/1/2012
By Michael Kahn | MarketWatch

NEW YORK (MarketWatch) — I won’t bore you with the nitty gritty of the old saw, “sell in May and go away.” Basically, it is a quick way to remember that the summer half of the year is not often kind to investors.
With a year’s worth of gains already logged in the first quarter and technical deterioration across the board it does look like the bears are poised to take control.
Stocks logged one of their best first quarters on record this year but the fun ended when the Federal Reserve took their T-bird away. By hinting that it would no longer flood the market with cheap money — a new round of quantitative easing — it gave the market’s natural forces a chance to reassert themselves. And they did.
As last month ended, major market indexes had broken down below respective rising trendlines and smaller capitalization indexes were below 50-day moving averages. The bears were back.
The question is whether May will see downside follow through and the evidence suggests that it will.
The tendency of the market to struggle between May and October means the bulls are fighting a long established seasonal battle from a disadvantage.
Chart 1
The biggest change was found in the Nasdaq where technology issues did a rather abrupt about face. A chart of the index shows a trendline drawn from the November low, excluding one data point in December, was soundly broken to the downside last month . (See chart 1)
As mentioned earlier, the 50-day average was also broken to the downside. And even more importantly, the relative performance of the Nasdaq (XNAS:^IXIC) vs. the broad market as represented by the Standard & Poor’s 500 (:^GSPC) also took a turn for the worse.
This is significant because the Nasdaq and the tech sector was one of the engines driving the rally all year. The loss of leadership without another group stepping in to take over is not a good sign for the market.
The question remains, “what do we do about it?” For the average investor, the answer is not going to be a surprise: cash and income.
Taking a little off the table to reduce risk is always a good idea in troubled times. Economic problems in Europe have returned to the front pages. Superstar stocks such as Apple Inc. (AAPL) and Priceline.com (PCLN) have run into serious trouble on the charts. And again, May is the start of the summertime blues for the market.
The other part of the plan is to use big dividend yields as a cushion against market weakness. The bond market does not offer much help here with the benchmark U.S. Treasury note yielding about 2% and money market funds yielding virtually nothing after taxes.
Fortunately, there are stocks with more generous yields, at least more generous relative to other choices. One sector where 4% yields are common is utilities. While the business model has changed from simple power generation to a more diversified mix, relatively high dividend payouts are still common.
Chart 2
Look for stocks that have stable charts and supporting technicals that lean to the bullish side. For example, Hawaiian Electric Industries (HE) sports a mild corrective decline in 2012 within an overall rising trend from a major 2009 low. (See chart 2)
It is above both its key 50- and 200-day moving averages and in early April the bears tried. but failed, to take it down. A false breakdown below support as seen in the chart led to an upside breakout a few weeks later. With a nice 4.8% dividend yield, this is a good place to hide from the storm.
There are other areas of the market offering big dividends but stable charts are a bit problematic. Some have already rallied a good deal and show signs of tiring. Others are actually in decline and capital losses can overwhelm a good dividend.
The bottom line is that the market is entering the time of year where, to misquote Shakespeare, discretion is the better part of valor. Capital preservation is more important now than capital growth.
Michael Kahn writes the Getting Technical column for Barron’s Online , which analyzes sectors and markets twice a week. Sign up for a free technical analysis chart of the day at QuickTakesPro .