Three Reasons to Stay The Course in a Sloppy Market

No doubt it has been sloppy in the markets lately. Seasonal weakness, along with the drama in Europe, has made for a pretty cloudy outlook. But there are three high-level things worth a quick look to help steady your nerves if the headline news makes you a bit shaky these days.

First, despite the chatter, the long-term case for stocks heading higher later in 2012 still remains strong. It's important to remember that money will tend to flow toward the highest potential returns. And with bond yields stupidly low and real estate still bumping along without a clear recovery yet, stocks are where the action is.

By historical standards, stocks are fairly valued with the S&P 500 trading with a PE of 15, close to its historical average of 15.5. That means there are likely numerous opportunities to pick up household names trading below their historical average valuations. These consolidation periods are a great time to enter a starting position in names you like – you'll gain access to the upside if it rises and if it falls further you stand ready to add to your position at a better price. Remember that the cheaper a stock gets the more you can buy, so low prices can be a good thing if you're investing for the long-term.

Second, history suggests that buying in summer will lead to outperformance. Randy Frederick, Charles Schwab's Managing Director of Trading and Derivatives, recently stated that from 1950 through 2011, the S&P 500 posted an average return from Memorial Day to Labor Day (68 trading days) of about 1.1%. Combine that with the recent market weakness (the “sell In May” strategy now appears accurate for four of the last five years) and it becomes more probable that buying into the spring weakness will lead to outperformance.  

I'm not suggesting that 1.1% is anything to write home about. But for stock pickers – and especially small-cap and resource stock analysts like me – a slightly upward trending broad market can be a great time to get positioned for future gains with relatively low short-term risk. Positions can be entered on calm days or days when a target stock drops on no news due to market inefficiencies. Then those gains can be harvested in the fall.

Just to drive this point home, last summer between the beginning of May and the end of September I recommended nine stocks to subscribers of Small Cap Investor PRO. As of right now, five of these are in the black with an average gain of 39%, and four were closed out – two winners and two losers. Two recommendations from summer of 2010 are currently up 175% and 442%. The point is, summer can be a great time to sow some profitable seeds, even if it is uncomfortable to do so at the time.

Finally, we are in an election year (has it been four years already?). These have proven positive for stocks 12 of the last 15 times, with an average gain of 6.6%. Thus far, the market is up just over 3.5% YTD, implying we have more upside yet if historical patterns hold true.

Put it all together and history suggests that sticking to a steady strategy this spring and summer will help you power through the current slop, and ultimately be positioned for a profitable 2012.

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