Here's What You Trade When Stocks Pull a "Switcheroo"

Sell in May and go away is the oldest investing trick in the book.

It rhymes—so it must work, right?

But what the heck are we supposed to sell?

Not stocks. The major averages looked ready to roll over until a late rally pushed them back into the green. Not oil. Crude continued its climb toward $50. Even the Almighty Dollar enjoyed a powerful May rally, pushing the red-hot precious metals lower for the month.

Just when you think you have something figured out, this ornery market pulls the ol’ switcheroo and stomps your trade into the ground.

Now that May is in the can, we’re ready to see what the market throws our way. Stocks around the world are slipping into the red to begin the new trading month. But we’re seeing some rumblings under the market’s surface that prove investors aren’t quite ready to throw in the towel just yet…

A couple of speculative sectors are hinting that the late May rally might not roll over just yet. They’re also telling us exactly where to plan our next move as traders hint that they’re willing to accept more risk.

And right now, risk is the name of the game.

Last year you saw firsthand what happens when investors shun risk and flee to big, “safe” stocks. Small-caps, biotechs and other speculative names got crushed.

It makes sense. These are the stocks you’d normally knock down a few pegs when the going gets tough. But these are also the first groups to put in a meaningful rally when the markets begin turning around.

We talked a lot about the market’s broken stepchildren as the market launched off its lows earlier this year. The major averages had recovered after double-digit corrections. But those poor souls that had been mired in bear markets were actually leading the way higher.

Take the small-cap Russell 2000. These forgotten small-caps helped tell a big story about the market’s recovery off its February lows. The Russell endured a true bear market over the past eight months—a 20% correction.

But the Russell jumped back into action in April, breaking above its 200-day moving average. It was the index’s first move above this important level since last August.

Small-caps are sneaking back to the front of the pack after last week’s rally. Over the past ten trading days, the Russell 2000 has jumped nearly 3.5%, compared to a 1.5% gain in the S&P 500.

SmallandStrong-DR

And small-caps aren’t the only forgotten names to catch a break.

Remember biotechs? These sickly stocks are finally showing some signs of life after putting in a choppy bottom.

It took some extra time for biotechs to join the party this year. While every other sector and industry enjoyed a nice pop since the market bottomed this winter, biotech stocks continued to lag. A sharp April rally fizzled almost immediately. But biotechs were able to hold just above their March lows. Now they’re once again outperforming the major averages.

Over the past 10 trading days, the SPDR S&P Biotech Index is up more than 10%. And it looks ready for higher prices…

SPDR-DR

While the market’s whipsaws rip apart most investors, you have an opportunity to ride out the chop with a couple of quick trades.

Sincerely,

Greg Guenthner
for The Daily Reckoning

P.S. Make money from biotech’s comback — sign up for my Rude Awakening e-letter, for FREE, right here. Stop missing out on the next big trend. Click here now to sign up for FREE.