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Prepare For Sell in May With These ETFs

April 15, 2013 4:05 pm
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Monday is just one day of market action, but a nasty one at that. While it pays not to get emotional over a single trading day, it also pays to be prepared.

With just two weeks left in the month of April, it could be a good time to start preparing for the phenomenon known as "sell in May and go away."

Of course, there are no guarantees that sell in May and go away will be the scenario that plays out this year, but history has shown time and again that the May through October time frame is often unkind to stocks. Notable is the fact that some sectors and assets classes have a tendency to wilt during the summer months and that under-performance often kicks off at some point in May.

With that in mind, several marquee ETFs across various asset classes were examined for noticeable weakness in the May-June time period over the last two years. Investors will want to have a look at this list because the plain vanilla equivalents of the inverse ETFs highlighted here are among the most popular ETFs on the market today.

iShares Silver Trust (NYSE: SLV)
The largest ETF backed by physical silver is down 15 percent in the past five trading days alone, perhaps a sign that the white metal is kicking off its seasonal weakness a couple of weeks early. Same goes for gold and both gold and silver end a period of historical weakness in May that usually lasts until early June.

Looking at recent May performances for SLV, the ETF performed fell in 2011 and that was after silver fell from near record highs in April of that year. SLV's May 2011 decline was fraught with increased volatility as investors cringed at the notion of silver market manipulation. By the time June ended, SLV was trading lower than at any point during April.

May 2012 was similarly unkind to SLV as the ETF slid about 10 percent during that month. Two months may not make a trend for some folks, but it is clear the last two Mays have been unkind to SLV and given the ETF's performance on Monday, the third May (May 2013) will not be the charm to right the course for SLV. All this is very good news for the ProShares UltraShort Silver (NYSE: ZSL), which is up 38 percent in the past month.

ProShares UltraShort FTSE China 25 (NYSE: FXP)
Already disappointing to start 2013, long China ETFs were back in the spotlight Monday when the world's second-largest economy reported first-quarter GDP growth of 7.7 percent. That missed the consensus estimate of eight percent and the report has investors fretting over another summertime swoon for Chinese stocks.

As it is, the iShares FTSE China 25 Index Fund (NYSE: FXI) and other China ETFs have struggled mightily. FXI in particular has been hurt just because it is the largest China ETF, but also because several of its 26 holdings have been showing obvious technical weakness.

FXI was basically flat in May 2011, but by mid-July, the ETF was down nearly 10 percent from the end of May. May 2012 was even worse as FXI lost 12.8 percent. The previous two summers have been cruel to FXI, but that will work in favor of the ProShares UltraShort FTSE China 25. If the double-leveraged bearish play on FXI trades above $22.75, a new up leg (or down leg for FXI) could be in the offing.

ProShares UltraShort Oil & Gas (NYSE: DUG)
The ProShares UltraShort Oil & Gas seeks to provide twice the daily inverse performance of the Dow Jones U.S. Oil & Gas Index, the same index tracked by the iShares Dow Jones U.S. Energy Sector Index Fund (NYSE: IYE).

Energy ETFs have been impressive as far as high-beta sector funds go this year, but the risk is that this group will obey its own seasonality. That includes the best time frame in which to own energy stocks ending in May.

IYE has obeyed that seasonality. The ETF fell slightly in May 2011 and those declines were extend through June before the surged into late July. That pop gave way to a 22 percent drop into early August. In May 2012, IYE dropped nearly 12 percent. Traders may be preparing for a repeat performance as DUG gained 7.6 percent on nearly quadruple its average daily volume today.

With DUG, keep an eye on how Exxon Mobil (NYSE: XOM) and Chevron (NYSE: CVX) are trading because those stocks combine for over 36 percent of IYE's weight.

For more on ETFs, click here.

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