Posted April 29, 2013 8:57
There are two scenarios that are possible for the month of May. The first is that the market continues its run higher and reaches new all-time highs. The second, which I find more likely, is that there is a 5% correction and the theory of “Sell in May and Go Away” will come to fruition.
There are many factors that can lead to this, some of which include a disappointing jobs report, a hawkish fed meeting, a disappointment by the ECB, and more political unrest in Washington as leaders from both parties try to create a fix for the debt problem. If there is a 5% correction, it is possible that the bottom will be immediately bought and the market rally will resume. Another possibly is that the market will sell-off more into the summertime and we would see a much deeper sell-off. Considering the fact that we have rallied so much, it wouldn’t surprise me to see a steep sell-off, one that may scare many people from buying. But I do believe that if you buy the dips in strong sectors such as the financials and some of the defensive sectors, your portfolio will be rewarded in the long run.
Another strategy that may be appropriate, is instead of buying stocks at this moment, or after a mini-correction, buy call options. When buying a call option, you give yourself the right but not the obligation to buy a stock at the strike price. This is done to catch any potential upside while limiting your risk in case the sell-off gets worse. If you are heavily invested, buying put options to protect your portfolio would also be a smart thing to do. By buying a put option, if the market falls, that put option will profit and then cover some of the losses incurred by your stocks in your portfolio.