Keep your guard up

So much for the "sell in May and go away" strategy. I've never been a big fan of seasonality. At best, I will consider it a supporting indicator if it's giving the same message as the more important indicators I track. So, according to seasonality studies, the next 6 months are the favorable months to be invested in the market. Again, I will not hang my hat on such a view whatsoever. Right now, the ST sentiment backrop for the market is not good. The Rydex ratio, NAAIM, AAII and fund flows are all suggesting that there's too much ST exuberance in the market.There have been a few times in this bull market and in the bull market of 2003-2007 where ST sentiment gets this frothy but stays frothy for several more weeks with the market chugging higher, but when that did happen the correction that followed wiped out all those gains and then some. Bottom line here is that it's time to ring in the register and lighten up and/or put on some hedges. I've chosen to do the former for now.

I've lightened up significantly on my position with hwo.to for a few reasons aside from ST market concerns. The stock got a nice boost a couple weeks ago when a popular CDN  fund manager named Jason Donville spoke favorably about the company on BNN. This was the first time any so called "guru" mentioned hwo in years. Although the company continues to hum along well with its business making a healthy amount of profit, they are likely not going to show any growth vs last year. Although only 30-35% of  revenues are in Canada, its still gets under the pull of the CDN O&G service sector in general and according to my trusted source (a former CEO of a CDN service company) Q3 earnings for the service sector is poised to once again show a y-o-y decline in Q3. This sector has shown considerable weakness in earnings/cashflows this year which has made hwo's "flat growth" look stellar, but despite weak earnings most of the stocks in the sector have managed to post respectable gains so far YTD because of high hopes of the LNG related drilling that is expected to take place in Q4 and Q1. I'm not willing to take such a leap of faith with the stocks up on the year like this. If we see yet another weak quarter of earnings for the sector and the market in general gets under pressure, I don't see how people will look at the service sector as some sort of safe haven, if anything, it could get hit the hardest and so with hwo getting a well timed pump from Donville, I just had to ring the register given my heavy exposure and all the aforementioned concerns. It's a tough call because the stock is by no means fully valued; it can still very well go significantly higher if they announce some good news like an acquisition or new contract, but the stock is no longer the screaming bargain it was a year ago and it has a history of being very volatile and I doubt most of these "Donville buyers" are true believers of the company and therefore are not strong holders.

Greenstar has been drifting lower for the past month and I'm not surprised given what I believe is a supply overhang as I discussed in a recent post. There is no news or other fundamental issues to account for the weakness. Unlike with hwo, my conviction level for GRE remains very strong even with my ST concern about the market. At this silly valuation and given the outlook for GRE's earnings in the coming quarters, I know that time is on my side. The stock could very well continue to go lower in the ST, but simple mathematics indicate that the current price is unsustainable in the LT. Will I be annoyed, frustrated and start having paranoid concerns in the back of mind if the stock continues to slide? Of course, but that's the price you have to pay when you have a "pot committed" position. In the meantime though, I will collect a generous dividend.