Summer Slowdown? Don't Worry, You Can Still Profit


With an early-year rally seemingly forgotten—and most of the market's big worries out of the way for now—investors may be left with little to do but find ways to make money in a sideways market.

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It's not as hard as it may sound. Despite rangebound stock indexes, the 2012 stock markethas shown an ability to break the crippling correlationsthat made everything either rise or fall at the same time and diversification nearly impossible.

That means sharp-eyed investors can find ways to profit even when Wall Street seems locked into a summertime slowdown.

"We still think any and all dips will be fairly aggressively bought due to the fact that a lot of hedge funds and institutions are underexposed," says Ryan Detrick, senior analyst at Schaeffer's Investment Research in Cincinnati. "This choppy action could be here, if not to stay, at least for the intermediate term as we work off the excesses from the massive rally."

The Standard & Poor's 500 has risen 11.5 percent year to date, with technology, financials and consumer discretionary stocks leading the way and energy and utilities the laggards.

But that momentum has started to change, with April showing a reversal of fortune for both gainers and losers.

For instance, dividend-payers outperformed in April after lagging for the first quarter, and companies with a large portion of international revenue — among the leaders in the first three months — got hit the hardest during April's market decline.

"There are certain sectors that will buck the trend. We still think there's too dour an outlook," Detrick says. "We like to see things that do well in the face of negative sentiment."

Among the best sectors going forward, he says, will be housing stocksas the recovery picks up in that industry, as well as discretionary firms, which have broken out to new highs after taking a hit in April.

"We're kind of in a digestion phase," says Michael Cohn, chief market strategist at Atlantis Asset Management in New York. "I'm kind of in a 'show me what's wrong this market' phase."

For Cohn, some of the best values as the market gyrates will be in retail and other discretionary names. Overall, the thinks the market is on a gradual climb higher.

"I'm not adverse to lightening up a little here. May is usually a crappy month," he says. "I'm not selling for any other reason than maybe a little seasonality."

Indeed, springtime has not been great for the markets, with the S&P 500 right where it was on March 13. The flat trend has come despite an earnings seasonthat while not spectacular certainly beat some of the gloomy predictions.

One early-year trend that has held up has been growth over value.

Savita Subramanian, equity and quant strategist at Bank of America Merrill Lynch, points out that the Russell 1000 Growth stocks beat the index's value counterpart by 0.87 percentage points in April.

"While this style performance did not hold true for small cap stocks in April, the Russell 2000 Growth benchmark is still outperforming the value benchmark by (1.44 percentage points) so far this year," she said in a note. "Growth over value remains one of our themes for the year."

Even some of those not so convinced by the market believe that growth will remain a good watchword, though with some caveats.

Investors need to be selective and to be sure to hedge their positions, says Uri Landesman, president of Platinum Partners hedge fund in New York. He favors oil and gas sectors, as well as biotech and technology.

"My gut is this is the high for the year," says Landesman, who believes the S&P 500 could hit as low as 1,200 at some point. "The balance of risk is to the downside. The data is going to be weaker, Europe is going to cause problems, employment is going to slow — just in general things that we've been seeing from the US economy are not going to continue at the same rate."