Bleeding Red

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May 17, 2006 | SIN Picks | | Author Asif

The sudden steep drop in the markets over the last few days has left investors wondering if the old Wall Street adage “Sell in May and Go Away” is indeed a good idea. The Dow Jones Industrial Average lost 214 points on Wednesday, its biggest drop in over three years while the Nasdaq dropped for seven straight trading sessions essentially wiping out all its gains for 2006. I expected some weakness in the stock market in the latter part of this year thanks to a falling dollar and inflation but did not see it coming this soon. The latest fed meeting that left the door open for further interest rate hikes along with an increase in core inflation has left investors jittery. With the real estate bubble slowly deflating, bonds steadily losing their value in a rising interest rate environment, commodities at a multi-year peak and simultaneous losses in the domestic and international stock markets, hedging a long portfolio becomes very hard. Indeed this high correlation between various asset classes was discussed in a very interesting article in Fortune magazine.

The recent decline in stocks was widespread across almost all sectors and Intel (INTC) fell to $18.66, a level not seen since May 2003. It was surprising to see SINLetter pick Philips (PHG) fall more than 9% since the beginning of this month even after releasing strong quarterly results.

While it pains me to see 6 out of the 13 stocks in the SINLetter model portfolio in the red, I am happy to see that the portfolio has retained all of its gains since the beginning of this year and have even posted a modest gain in May thanks to upward momentum in Medifast (MED), which is now registering gains of 209.83%. The valuation of some of the companies I am following look even more attractive now but it may be prudent to wait a little longer to see if this weakness continues before initiating additional stock purchases.

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