Sunday, July 16, 2006

Caution Warranted in Stock Market till Autumn

I'm not an investment advisor, but I keep my ear to the ground and subscribe to some good market advice. The advisories I pay lots of attention to are all talking about considerable market danger between now and the September-October time frame. They are talking about reducing risk.

Not, it's not necessarily about the outbreak of fighting in the Middle East (although that could make things worse, at least temporarily). The market often doesn't respond to news the way you think it will. Right now I'm talking about seasonal and cyclical factors.

First, the period from summer through October is often weak in the markets. You may have heard the saying "Sell in May and go away," which is not an old wives' tales -- it has a lot of truth to it. For instance, a lot of money has been lost since the market started tumbling on May 11 of this year.

Second, a lot of market action can be understood by fitting it into a 4-year cycle. Why four years, I don't know, except I suspect it's related to the Presidential election schedule and the efforts of each administration to stimulate the economy to get re-elected. For whatever reason, the market has a strong tendency to reach a notable low point around October of a midterm election year. And of course 2006 is one of those.

In other words, not only are we coming up on the worst part of the year, but we are also coming up on the worst part of the four-year cycle.

Therefore caution is advisable.

The advisors I respect are taking precautionary measures such as selling some growth stocks and concentrating more on safety and income for the next several weeks. It's looking like even oil stocks may not be immune to the weakness, even if the price of oil remain high (and it might also back off, at least for a while).

Stocks could still have a nice bounce in late July or August, but the experts I listen to are saying to take that opportunity to lighten up even more.

But be alert; the period from about November through January is the best part of the year for stocks.

Of course, any given year can vary, but these seasonal tendencies hold true over time.

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