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Get Your Portfolio In Shape For a Long, Hot Summer

For investors, this summer is going to be anything but a day at the beach.

With skyrocketing oil prices, the continued threat of recession, and no end in sight to the housing slump, investment pros are expecting a rough time for the markets. A stock rally? Not likely.

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Still, that doesn't mean you should bury your head in the sand. Investment advisers say there are plenty of opportunities not only in stocks but bonds and commodities.

Here, then, are some tips to get your portfolio in shape for the summer.

Stocks

Outside of Dow transports, playing index funds, at least to the long side, could be a little risky. Analysts think there's not much reason to bet on a sharp move upwards.

"It helps me if the market goes up, but there's no reason to buy stocks right here," says Dave Rovelli, managing director of US equity trading at Canaccord Adams in Boston. "If we see light at the end of the tunnel then I would say start chipping away. But with oil at $134, $135 a barrel now, I think it's just too scary."

For the time being Rovelli is keeping his money in cash--a money market account to be specific, which speaks to how much reticence there is towards playing stocks under current conditions.

The biggest opportunity likely will come in finding moves specifically related to the bad news hitting Wall Street lately.

Specifically, David Kotok, chairman of Cumberland Advisors, says he's long right now on ETFs for transport, and likes rail and large trucking companies, which he says are chewing up their smaller competitors because they can more easily withstand the surging gasoline costs.

CSX has been an especially popular choice among rail companies, which analysts say will benefit as carrier services reliant on fuel to transport their goods suffer.

Technology also is a popular choice going forward as a sector not as heavily influenced by rising fuel costs.

Nadav Baum, managing director of investments at BPU Investment Management in Pittsburgh, thinks cutting-edge companies such as Blackberry-maker Research in Motion and Apple will prosper. Baum also is sticking with his strategy towards financials like Bank of America and JP Morgan Chase that may have lackluster earnings ahead but pay handsome dividends.

"It's going to continue to be tumultuous, but for those that have that long-term horizon there are some great buys out there," Baum says. "The volatility is going to come back in the summer and right now when you look at it there's no catalyst for the market to move higher."

In the meantime, consumer-staple health care companies are attractive to John Massey, senior vice president and portfolio manager at AIG SunAmerica Asset Management, who recommends pharmacy chain CVS and Dow stalwart Procter & Gamble.

"We continue to be invested in some of the defensive areas because we're still a little bit worried about the consumer," Massey says.

Emerging markets get the nod from Bruce Fenton, president of Atlantic Financial, who advises ETF plays on growth in the Middle East. SPDR offers the S&P Emerging Middle East and Africa fund based on equity markets in the two regions.

"In my opinion it is by far the most underlooked story but it's one of the great growth stories of our lifetimes," Fenton says of the MidEast.

Commodities and Bonds, Volatility and Volume

Commodities

Oil obviously is the big story in this group, but keep your eye on the grains as well, say analysts who expect stormy weather to generate low crop yields and higher prices for corn and possibly others in the group.

"Typically we see the market slow down in activity during the summer, but I think this summer is going to be a little different," says Kevin Kerr, an analyst with the Resource Trader Alert online newsletter. "We have a lot more players in the market and I think commodities have been underestimated."

But Kerr is more favorable towards grains, where he is long on corn futures and also is looking for an upswing in soybeans and perhaps wheat. Oil, he says, is too risky.

"Fundamentally there's plenty of oil in the market at the moment, so in our opinion it does not justify this price," he says. "But that would mean going contrarian to this very parabolic market, so it leaves us no opportunity but to stay on the sidelines."

"The narrow play on crude is dangerous," Kotok adds. "People are going to get their fingers burned on this. We are on a parabolic curve. ... We're not seeing what economists call 'elasticities' come in to change (consumer demand), but I believe that is soon to happen. Behavioral changes at $4-plus dollars a gallon (of gas) has got to happen."

Kerr thinks oil drillers like Anadarko will do well as the world looks for more supply, he says, adding refineries to that list as well.

He also says silver will be a strong play in the metals due to high demand, and he even identifies orange juice futures as a strong play in part because of why he likes corn--a rough storm season ahead.

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"It's really been sold off very, very hard on the idea that the (orange) crop will be fine this year," he says. "This is ahead of hurricane season, and who knows what could happen with that?"

Bonds

Treasury bond prices slipped and yields grew as the stock market staged an impressive rally in early May. But while stocks face an uncertain mid-term future, many who trade US government debt think yields will continue to rise as inflationary pressures mount.

Benchmark 10-year notes could see a 4.25 percent yield by the end of the year,

David Dietze, chief investment strategist at Point View Financial Services in Summit, NJ, told Reuters.

"On the one hand you have higher producer prices, commodities and higher energy prices, which will be pushing up inflation and inflation expectations. On the other hand I am not sure we have seen the end of near-recessionary conditions in this country," he said.

Dennis P. Barba Jr., managing partner at The Oxford Group of Raymond James, favors municipal bonds as investors face the sobering prospects of the stock market. Even at relatively low yields, he says, munis are paying better than CDs and some other cash positions.

"What I'm sensing in talking to people is they're getting complacent. I think we've still got issues we have to work through," Barba says. "I don't think the storm is completely over."

Volatility and Volume

When stocks made their surge, the Chicago Board Options Exchange's Volatility Index fell to areas not seen since last October. But in the past several trading days the VIX has regained some ground and is now approaching the volatility threshold of 20.

Analysts are seeing choppy days ahead.

"There's a lack of conviction," Massey says. "There's plenty of opportunity for the trading community, the fast-money crowd that wants to get in and get out. Long-term investors are seeing anemic volumes, and a lot of that has to do with people who have made their best and are in for the long haul.

"Then there's a community that's out of the market. They're sort of waiting for the economy. There's 20 percent of the people who are sort of sitting on the sidelines to see how all this transpires and unfolds before getting involved in the market."

Baum says both increasing volatility and low volume can be traced to oil and the uncertainty it is spreading through Wall Street.

"This whole oil thing is starting to catch up with everybody, and it's interesting because May is usually not a big inventory month when the prices of oil go higher. Now everybody's saying wait until June or July," he says. "Markets always react to uncertainty."