10 Reasons to Walk Away in May: Part 1

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A little more than two weeks ago, my Foolish colleague Alex Dumortier examined the old adage "Sell in May and go away" only to discover that the strategy was actually less successful than traditional buy-and-hold strategies.

The proof is in the pudding for Motley Fool Stock Advisor selection (Nasdaq: PCLN  ) , which has grown like a weed internationally. The pick has returned more than 2,700% since Fool co-founder David Gardner recommended it in 2004.

But does this mean you should ignore the recently negative and uncertain economic data in favor of purchasing stocks in May and holding stocks for the long term? I'm not as certain about that. In fact, I'd say that instead of "sell in May and go away," your best course of action might be to simply "not buy in May, and hold what you've got."

There are multiple macroeconomic warning signs -- 10, to be exact -- that are causing me to keep my finger off the buy trigger. It's my suspicion that the market is heading lower over the coming months and the following 10 factors have everything to do with it.

Today, I'd like to share with you the first five reasons I'd rather take my cash and walk away in May. I'll be back with the other five tomorrow.

1. Spanish debt
It's not will they or won't they; it's just a matter of time until Spain needs help. Economic figures in Spain are worsening at a very rapid pace, including a tripling in the unemployment rate since 2007, and a youth unemployment rate just over 50%! In addition, Spanish citizens put a majority of their wealth into their homes, and that wealth is dropping like a rock as home prices recede from their highs.

Perhaps the biggest problem Spain is facing is that its banks seem unable to cope with 176 billion euros' worth of questionable commercial real estate loans as is evidenced by last week's nationalization of the country's No. 4 bank in terms of assets, Bankia. The nation's largest bank, Banco Santander (NYSE: STD  ) , doesn't have nearly the same exposure, but a weakening economic outlook is beginning to take its toll on it as well.

2. Eurozone elections
Just when it looked as if Greece would be off the world's radar thanks to a 130-billion-euro bailout package, recent elections in the eurozone are threatening to screw up that false peace. In France, incumbent President Nicolas Sarkozy, who was instrumental in negotiating Greece's bailout, is out, and Socialist Party nominee Francois Hollande, who favors reworking his nation's debt package and increasing government spending, is in as the new president.

In Greece, voters voiced their displeasure by voting hardline anti-austerity members into office at the expense of many who had helped formulate Greece's bailout deal. Market uncertainty is never a good thing.

3. U.S. budget deficit
There's little denying that the only thing Democrats and Republicans can agree on when it comes to spending is that they'll disagree. With up to $2.5 trillion scheduled to be cut out of the U.S. budget over the next decade to satisfy the August 2011 raising of the debt ceiling, many sectors are beginning to feel the pinch.

Worse yet, the bipartisan special committee selected to come up with a plan to reduce the federal budget by $1.2 trillion failed to come to a consensus in November. This means automatic cuts of $500 billion can be expected in the defense sector (on top of the $350 billion already agreed upon) beginning in 2013, with health care also expected to see cuts.

Defense contractor Lockheed Martin (NYSE: LMT  ) has already warned of "massive layoffs" if Congress can't come to a consensus.

4. U.S. elections
It's not that elections are necessarily bad news; it's that they create a level of uncertainty that the markets often don't like. If one candidate had a clear edge, the market would probably be more forgiving, but with the prospect of a toss-up between President Obama and expected Republican nominee Mitt Romney seeming likely, it's anyone's guess where our economic policy may have us heading in a matter of months.

5. Case-Shiller Index still falling
Investors may be grasping at every glimmer of hope from the housing sector, but the truth of the matter is that home prices are still depressed across the nation's largest cities. The Case-Shiller Index, which measures home prices in 20 of the largest U.S. cities, dropped to new lows in February and signaled that a recovery is still a long way off.

Source: Robert Shiller, Irrational Exuberance.

Glimmers of hope do exist, as we witnessed with both Lennar (NYSE: LEN  ) and D.R. Horton's (NYSE: DHI  ) earnings reports this quarter. New orders grew by 33% for Lennar, while D.R. Horton tacked on a 19% rise in new home orders. But this does little to stem a glut of foreclosed homes and bank-owned properties waiting in the wings to flood the market. With little pricing power, the housing sector looks like a shell of its former self and the days of housing as a growth driver of American wealth seem like a distant memory.

To be continued...
Tomorrow, I'll pick up right where I left off and name the five other key catalysts that I feel are going to put serious pressure on world markets over the next few months.

As always, I welcome questions and comments, so let me hear them using the comments box below!

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Fool contributor Sean Williams has no material interest in any of the companies mentioned in this article. You can follow him on Motley Fool CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool owns shares of and Lockheed Martin. Motley Fool newsletter services have recommended buying shares of We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy that has your best interests in mind.

Read/Post Comments (4) | Recommend This Article (14)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 16, 2012, at 7:00 PM, xetn wrote:

    I believe that the US is worse than most of the PIGGS in terms of debt which according to some sources is 400% of GDP (adding in entitlements, etc).

    There has also been a spike in US interest rates which could really damage the so-called recovery. (Funny, we haven't heard much about Bernanke's green shoots lately.)

  • Report this Comment On May 16, 2012, at 8:08 PM, agrigold wrote:

    Europe will have a major setback with the Greek election on June 7; The Germans won't be able to have the rest of the countries follow their plan and recession will hit all the PIIGS. So what makes anyone think our markets will improve ? If you decide to hold your present positions, be prepared for a very long hold to get back to profitable position--just hope they don't cut the dividend. Oh yes, if Congress doesn't act those dividends are going to be taxed at you income tax rate, not 15 %.

  • Report this Comment On May 18, 2012, at 4:06 AM, strelna wrote:

    I congratulate you. The macro scene is usually strictly off-message at TMF. Too many writers still live in a Lynchian world and write as if it did not matter!

    It is all quite different now - in several ways. An appreciation of how value has historically been expressed by ratios can protect the downside and how holdings could be affected by worldwide events can be essential.

  • Report this Comment On May 18, 2012, at 11:32 AM, gordonsgold wrote:

    Hi Sean,

    The ECRI still has a recession schedule for what 2013/2014 and in my opinion is based on you writings.

    Can you discuss this issue in another posting?

    What say you?


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