Where to go if you ‘sell in May and go away’

NEW YORK (MarketWatch) � After a blowout first quarter, investors may be feeling a sense of deja vu � both 2010 and 2011 saw an early rally in the stock market that was followed by a dramatic downturn beginning in the spring.

As the market�s historically worst six months of the year draw closer, many on Wall Street see another stock slide looming.

�I do believe that we�ve set ourselves up for another seasonal downturn,� said Jeffrey Hirsch, editor-in-chief of Stock Trader�s Almanac. May through October is typically the worst six-month stretch for stocks.

Without the over-arching influence of the financial crisis, seasonal patterns are back in play, according Hirsch. �We�re getting defensive and cautious,� he said. �There are really no sectors that begin a bullish move right here.�

The rally so far has certainly been impressive.

The S&P 500 index SPX �gained 12% from January through March, posting its best first quarter since 1998. The Dow Jones Industrial Average DJIA �rose 8% in the first quarter; among its components, Bank of America Corp. BAC �surged 72%, J.P. Morgan Chase & Co. JPM �gained 38% and Microsoft Corp. MSFT �rose 24%.

Click to Play Global markets fearing end of stimulus

Spain found itself in the market's crosshairs as mounting concerns over the economy sparked a sharp slide in the country's bonds, erasing the effect of the ECB's cash injection.

Sameer Samana, international investment strategist at Wells Fargo Advisors, wrote in a recent report that investors should take profits since the easy money has probably been made and the bulk of the rally is over.

�We believe the market is overbought and this year�s advance is very similar to last year�s,� Samana said.

Equities had also started 2011 on a strong note, but a series of shocks triggered a selloff in May that lasted for months. They included the end of the Federal Reserve�s second round of quantitative easing, high oil prices, the euro-zone debt crisis and the U.S. credit rating downgrade. Spooked, investors sold stocks, with the S&P 500 losing nearly 20% from a high in May to a low in October.

This year, many of the issues that preoccupied investors in 2011 are still in play. The end of the Fed�s Operation Twist program in June is approaching. Oil prices are rising and could spike further if the West undertakes a military strike against Iran. Liquidity operations by the European Central Bank and the agreement on a second bailout for Greece have eased tensions, but Spain�s severe recession and rising bond yields are a reminder that the euro crisis is far from decisively resolved.

Moreover, the pace of economic expansion in China, one of the world�s most important growth engines, is slowing down. Other risks are potential disappointment in U.S. economic data and corporate earnings. And all this comes as the U.S. presidential election looms in November.

So, with many strategists expecting some type of market pullback, what should investors do to prepare?

Beware cyclicals, financials

�I�d say be wary of the consumer cyclicals and focus on defensive sectors [such as healthcare and staples], and companies with strong balance sheets, earnings visibility and dividend growth,� said David Rosenberg, chief economist and strategist at investment firm Gluskin Sheff. �You want to be very selective within the financials,� he said. �Housing stocks have already priced in a housing recovery.�

In the financial sector, Rosenberg�s firm has holdings in some Canadian banks � Royal Bank of Canada CA:RY , Bank of Nova Scotia CA:BNS �and Toronto-Dominion Bank CA:TD � and in First National Financial Corp. CA:FN , a Canadian mortgage originator, while in the U.S. it owns shares in J.P. Morgan JPM � and Capital One Financial Corp. COF .