INVESTING: Having an exit strategy can be a good idea

Keywords Utilities

It’s been a while. When it goes this long, I like to pick up my head and look around. My “Spidey” senses are telling me there might be some danger lurking nearby. But when it stretches out like this, there could also be opportunity.

The stock market has now gone almost six months without suffering a correction of more than 3.5 percent. Some people would say that is not unusual considering we are nearing the end of the traditionally strong period for the market. It won’t be long before the press starts picking up the drumbeat of “sell in May and go away.” And they might be right this time. They could at least motivate enough sellers to push the market into a 5-percent to 6-percent pullback. And for the careful investor, that’s a good move in the short run.

There is enough technical evidence to suggest that the rally since the October bottom is getting more and more selective. That means fewer stocks are participating in the rally. Historically, selective rallies don’t end well. In this case, it may be just enough to cause the bears to stir a bit.

With the Dow Jones industrial average now only 4 percent away from an all-time high, I keep feeling that sometime before the end of the second quarter, the Dow will set the mark. And of course that sets up the possibility that people sitting on cash will feel left behind and rush in, pushing the Dow up even further. But with a short-term correction growing more likely, the longer-term picture has to be examined. We are now almost 3.5 years into this bull market, and things could get dicey from here on out.

There was an article in USA Today recently that highlighted the number of days the current bull market has gone without a 10-percent correction. The current run is in fourth place all time, and like Barry Bond’s home-run chase, we are only days away from moving into second.

First place is so far out that I doubt we can attain it, but I can see this struggling rally push on for a few more weeks. But what if it doesn’t? And what if the next minor correction turns into something greater than 10 percent? You need a strategy, and now is the time to get it together.

I have been saying for a while that 2006 is the year we will see that 10-percent or greater correction. Not knowing the exact day it will start puts us in a difficult position, unless we use time-tested methods to provide profit potential as well as safety. It’s a simple strategy, really.

There are a few strong and reliable areas of the market that should hold up in the early phase of the selling. Hold this stuff until and unless it begins to break down. Right now, these strong areas are industrials, big banks and metals. Avoid or even short the excessively weak stuff such as semiconductors and utilities. This is a time for pair trades, and I am going to keep them until the market changes direction.

We are approaching the weaker period of the stock market calendar. Having an exit strategy nearby is a wise move right now.



Hauke is the CEO of Samex Capital Advisors, a locally based money manager. Views expressed here are the writer’s. Hauke can be reached at 566-2162 or at keenan@samexcapital.com.

Please enable JavaScript to view this content.

Editor's note: You can comment on IBJ stories by signing in to your IBJ account. If you have not registered, please sign up for a free account now. Please note our updated comment policy that will govern how comments are moderated.

{{ articles_remaining }}
Free {{ article_text }} Remaining
{{ articles_remaining }}
Free {{ article_text }} Remaining Article limit resets in {{ count_down }} days.