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Time for another spring sell-off?

By Greg Guenthner · Bankrate.com
Monday, April 22, 2013
Posted: 6 pm ET

This year has been good to investors so far.

The Dow Jones industrial average is up approximately 11 percent on the year. Household-name stocks -- namely consumer staples -- are soaring. Shares of Coca-Cola have risen more than 17 percent so far this year. Johnson & Johnson is up more than 21 percent.

Investors remain leery of the markets, so they're buying the big, safe stocks. But is it possible that this collective flight to safety is telegraphing a spring correction?

There's an old saying on Wall Street: "Sell in May and go away." Of course, it's not always a profitable move. If we could all simply follow this rule, everyone would be able to time the market and walk away with profits.

However, the sell-in-May mantra has actually worked very well for the past couple of years. In 2011, stocks enjoyed a fast start until they stumbled in late April. As it turns out, this was an early warning sign to the eurozone troubles that would eventually sink the market 19 percent in August and September.

2012 began with the same script. Stocks stair-stepped higher in an orderly fashion until a sharp drop in May, and June gave back all of the year's gains.

Fast-forward to 2013, and you will notice surprisingly similar price action in the broad market. Investors have enjoyed a steady rise in stocks with little interruption.

But recent market action indicates that investors might be readying for yet another spring slump. First-quarter earnings have been disappointing so far, with many management teams forecasting continued economic headwinds.

According to Bespoke Investment Group, out of the 200 companies that have reported earnings so far this season, only 58 percent were able to beat consensus earnings estimates. Revenue numbers came in even worse.

"Unfortunately, top-line revenue numbers haven't been pretty," Bespoke reports, noting that nearly 44 percent that have reported "have beaten revenue estimates, which would be the weakest reading seen since the financial crisis. Last earnings season, we saw a big bounce in revenue beats (when revenues beat expectations) after two very weak quarters, but it looks now like we're reverting back to what we saw in the middle of 2012."

As an investor, this should tell you to remain cautious. Don’t chase the flashy momentum stocks this spring. This might be a fine strategy for traders, but if you're investing for the long haul, there's no reason to place wild bets on risky stocks while the broad market is flashing warning signs.

You can't allow complacency to creep into your investing routine. It's important to remember that greedy investors get slaughtered. You want to put your hard-earned dollars into the best possible stocks -- without taking unnecessary risks. If we're entering yet another "sell in May and go away" market, you'll have plenty of time for bargain hunting this summer.

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Greg Guenthner, CMT, occasionally blogs about investing at Bankrate. The views expressed are entirely his own and do not reflect those of Bankrate.com.

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